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A CRITICAL ANALYSIS 

OF 

INDUSTRIAL PENSION SYSTEMS 



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THE MACMILLAN COMPANY 

NEW YORK • BOSTON • CHICAGO ■ DALLAS 
ATLANTA • SAN FRANCISCO 

MACMILLAN & CO., Limited 

LONDON • BOMBAY • CALCUTTA 
MELBOURNE 

THE MACMILLAN CO. OF CANADA, Ltd. 

TORONTO 



A CRITICAL ANALYSIS 

OP 

INDUSTRIAL PENSION SYSTEMS 



BY 

LUTHER CONANT, Jb. 



Ueto got* 

THE MACMILLAN COMPANY 

1922 

All rights reserved 



PEINTED IN THE UNITED STATES OF AMERICA 



HU nolo 
XUCfc 



COPYHIGHT, 1922, 

Br THE MACMILLAN COMPANY 



Set up and printed. Published September, 1922. 



Press of 

J. J. Little & Ives Company 

New York, U. S. A. 

OCT 18 72 

©C1A686365 






PREFATORY NOTE 

In offering this volume on industrial pension sys- 
tems to the public the undersigned desires to explain 
that the material was gathered in the course of an 
investigation of the pension problem made for the 
Bemis Bro. Bag Company, of which Mr. A. F. Bemis 
is President, and that it is through their courtesy that 
the information thus assembled is made available for 
publication. It should be understood, however, that 
the Bemis Bro. Bag Company assumes no responsi- 
bility either for the accuracy of the results or for any 
opinions, expressed or implied. 

Luther Con ant, Jr. 
248 Boylston Street 
Boston, Mass. 



CONTENTS 



CHAPTER PAGE 

I. Purposes of Pension Systems 

Introductory 1 

Broad objects of pension systems 4 

Pensions as a means of providing for dependent 

and superannuated workers 5 

Opinions as to the moral obligation of the 

employer 5 

•Affirmative opinions 8 

Negative opinions 11 

Attitude of labor in general toward private 

pension systems 18 

Attitude of organized labor 21 

Pensions as a reward for long service .... 24 

Pensions as a means of increasing efficiency . . 28 

By eliminating the superannuated .... 31 

By stimulating the active force 33 

Pensions as a means of reducing labor turnover . 37 

Pensions as a means of disciplinary control . . 41 
Conclusions as to proper purposes of a pension 

system 45 

Types of pension systems ,...,... 46 



II. NON-CONTRIBUTORY PENSIONS OP THE "DISCRETION- 
ARY" Type 

Are non-contributory pensions gratuities? ... 52 
Non-contributory pensions as deferred pay ... 53 
Conclusions as to deferred-pay issue .... 64 
Argument that a pension is pay conditionally de- 
ferred 68 

Conception of pension systems as a form of tontine 

insurance indefensible 72 

Effect of non-contributory pension systems on thrift 75 
Conclusions as to non-contributory systems of the 

"discretionary" type 78 

vii 



viii CONTENTS 



CHAPTER PAGE 

III. Non-Contributory Pension Systems of the "Lim- 
ited-Contractual" Type 

Advantages 88 

Disadvantages 90 

Conclusions as to pensions of this type .... 91 



IV. Contributory Pension Systems 

Deferred-pay issue under such systems .... 97 

Contributory pension systems and thrift . . . 101 

Progress of the contributory principle . . . . 102 

Disadvantages of the contributory system . . . 105 

Conclusions as to contributory pension systems . 107 



V. Cumulative "Single-Premium" Annuities as a 
Substitute for Pensions 

Features of the annuity plan Ill 

General arguments in favor of the annuity plan . 113 
Arguments against the annuity plan analyzed . .118 
Summary and conclusions 126 



VI. Informal Pension Policy vs. a Formal System 

Advantages 133 

Disadvantages 134 

Summary and conclusions 142 



VII. Cost of Pension Systems 

Methods of financing a pension system . . . . 146 

Systems without withdrawal or death benefits . . 150 
Systems providing for withdrawal and death 

benefits 153 

Long-continued increase in pension disbursements 156 

Actual experience under private pension plans . . 158 

B. & O. R. R. Co 158 

American Sugar Refining Company .... 163 

Otis Elevator Company 164 

U. S. Steel Corporation 165 

Cost of meeting "accrued liabilities" 172 

Costs under an informal pension policy .... 177 
Need of actuarial estimates in establishment of a 

pension system 180 



CONTENTS ix 

CHAPTER PAGE 

VIII. Cost op a Cumulative Annuity System 

Illustrative example 189 

Problem of "accrued liabilities" under an annuity 

system 132 



IX. Benefits to be Included in a Pension or Annuity 
System 

The retirement benefit 201 

The total disability benefit 203 

The death benefit 203 

The withdrawal equity 206 

Sickness benefit inadvisable . 208 

Provision for widows and children impracticable . 209 

Amount of benefit 210 

Arbitrary retirement age objectionable .... 214 



X. Summary and Conclusions 

Comparative analysis of various types of retire- 
ment systems 220 

Broader aspects of the pension problem .... 226 

Appendices 231-254 

Index 255-262 



TABLES 

PAGE 

1. Schedule of considerations (for males) at various ages 

necessary to provide a paid-up annuity of $10 to 
commence at age sixty-five 120 

2. Payments to pensioners and amounts appropriated 

by the company under Baltimore and Ohio Rail- 
road Company's non-contributory pension plan 
1885-1915 161 

3. Ratio of pensioners to membership in Relief Asso- 

ciation twenty-five years earlier under Baltimore 
and Ohio Railroad Company's pension plan 1883- 
1891 162 

4. Pension disbursements of American Sugar Refining 

Company, 1912-1920 163 

5. Pension disbursements of Otis Elevator Company, 

1913-1920 165 

6. Pension disbursements and number of active cases on 

the pension roll under United States Steel Cor- 
poration's pension plan, 1911-1920 166 

7. Average age, average service, and average pension 

under the United States Steel Corporation's pen- 
sion plan, 1911-1920 167 

8. Classification of pension cases under United States 

Steel Corporation's pension plan, 1911-1920 . . . 168 

9. Illustration of cumulative increase in pension outlay 

under an informal pension policy on various as- 
sumed bases 178 

10. Method of computing cost, for first year, of paid-up 

annuities for $10 each for a group of 500 male 
workers, all of whom have completed at least five 
years of service 189 



CHARTS 

PA6E 

Chart I. Curves showing estimated course of pension ex- 
penditures over a long period of years, under three 
different plans 157 

Chart II. Curves showing annual expenditures required 
of the permanent school pension fund of the city of 
Boston during future years under existing sal- 
aries and without increase in force ..... 159 



A CRITICAL 

ANALYSIS OF INDUSTRIAL 

PENSION SYSTEMS 

CHAPTER I 

PURPOSES OF PENSION SYSTEMS 

Introductory 

"Pensions are more irrevocable than any or- 
dinary kind of legislation." This statement, 
while applied by the author x to governmental 
pension systems, is almost equally applicable to 
private pension schemes. A pension system never 
should be started by an employer until he has 
satisfied himself beyond reasonable doubt that it 
will be continued. An establishment may suffer 
little because it does not adopt a pension sys- 
tem. But it may suffer much if it adopts a sys- 
tem without most careful examination. 

Many industrial corporations have studied the 
problem long and carefully without reaching a 
decision. Some apparently have decided defi- 

1 Geoffrey Drage. "The Problem of the Aged Poor." 

1 



2 INDUSTRIAL PENSION SYSTEMS 

nitely against a formal system. Many others, 
which have adopted plans without such careful 
study, have been compelled almost immediately 
to revise them. It has been stated that very few 
of the industrial pension plans in the United 
States to-day are so financed that they are likely 
to remain solvent without refinancing or modifi- 
cation. "With that staggering fact staring them in 
the face, it is no wonder that sensible business 
executives refuse to be stampeded into adoption 
of pension plans." * 

In the case of many municipal and other pub- 
lic service pension plans, failure carefully to 
count the cost has already resulted in bankruptcy 
of the pension system, either actual or construc- 
tive. Indeed, it is hardly too much to say that 
the history of pension schemes has been a record 
of mistakes or failures. Even the elaborate 
Carnegie Foundation plan was forced to undergo 
a radical reorganization only a few years after 
it was started. 

The financial aspects of the question, more- 
over, important as they are, are of subordinate 
consequence as compared with the broad eco- 
nomic and social aspects. 

The problem is an exceedingly complex one. 

1 "Pensions for Industrial Employees." Elmer B. Tolsted in 
Cotton, November, 1920. 



PURPOSES OF PENSION SYSTEMS 3 

The very nature of a pension is by no means 
generally understood or, indeed, easily definable. 
The word "pension" has come to have a very 
loose significance, and often is applied to pay- 
ments which in a strict sense are not pensions 
at all. The various types of pension systems 
present differences so marked that they cannot 
be intelligently discussed as a single group. Argu- 
ments applicable to public service pensions may 
not hold in the case of private systems. Finally, 
it is extremely difficult to determine the ultimate 
effects of such systems, not merely upon the 
worker's efficiency and his material well-being, 
but even upon his character. A system which 
upon its face is well adapted to meet an imme- 
diate condition may produce evils far worse than 
those which it seeks to remedy. 

A leading British actuary in discussing general 
old age pensions has said: * 

"The real fact is, that the more one studies 
such a thorny question as this, the more numerous 
and the greater are the difficulties which become 
apparent, and the more it is seen that, if the 
working classes for whose benefit old age pensions 
are advocated are not to be injured rather than 
assisted, the utmost caution and deliberation 
must be exercised before any irrevocable step be 
taken." 

1 George King; cited by Lee Welling Squier in "Old Age 
Dependency in the United States," p. 277. 



4 INDUSTRIAL PENSION SYSTEMS 

It is, therefore, almost imperative, before tak- 
ing up the question how a pension system shall 
be established, to consider whether it should be 
established at all. Until a satisfactory answer 
can be given to the latter question, there is little 
occasion to discuss the question of method. 



Broad Objects of Pension Systems 

Among the more important motives which 
lead industrial employers to adopt pension sys- 
tems are: 

A desire to provide for the old age of de- 
pendent, superannuated employees. 

A desire to reward employees who have ren- 
dered unusually long service. 

A desire to increase efficiency, first, by the elim- 
ination of superannuated or incapacitated work- 
ers on a humane basis and, second, by stimulating 
the good will and effort of the active force. 

A desire to hold the worker to the job, thereby 
reducing labor turnover. 

A desire to exercise a disciplinary control over 
workers in respect to strikes and in other ways. 

In some pension plans all of these motives are 
present; in others, only a portion. 

The broad objects of pension systems, as above 
enumerated, will now be examined. 



PURPOSES OF PENSION SYSTEMS 5 

Pensions as a means of providing for dependent 
and superannuated workers 
A large number, perhaps a large proportion, 
of industrial workers either can not or do not 
make adequate provision for their old age. When 
such workers reach a stage of superannuation 
the employer is faced with the alternative of 
throwing them back on society, with the knowl- 
edge that they will become objects of charity, 
or of himself making some provision for their 
remaining years. This practical fact has been 
an important and probably the controlling con- 
sideration in the establishment of industrial pen- 
sion systems of the day. From humanitarian mo- 
tives the employer is not content summarily to 
dismiss such superannuated workers after long 
years of service. Moreover, he often hesitates 
to do this, on the practical ground that such a 
policy may have an unfavorable reaction upon 
the larger body of employees still continuing in 
the service. 

Opinions as to the moral obligation of the em- 
ployer. At the outset it is important to determine 
whether the employer is really under a moral 
obligation to make provision for such workers. 
Clearly, if such a moral obligation exists, it should 
be met. 



6 INDUSTRIAL PENSION SYSTEMS 

The idea has a strong appeal. The worker has 
rendered a lifetime of service, yet for one reason 
or another may not have acquired a competence.. 
Worn out with years of labor, he is no longer 
able to secure employment. Is not the employer, 
therefore, properly to be charged with the respon- 
sibility of maintaining him in his old age? 

Some writers on the pension problem insist 
that there is such an obligation. Some industrial 
managers, moreover, have accepted this point of 
view. While the contention has been set forth 
in various ways, it may be epitomized in the 
statement that industry should not 'scrap' its 
old and incapacitated workers and throw them 
back on society in their dependent age." 

In the opinion of many other students of social 
problems, however, there is no such obligation. 
Instead, these critics hold that the responsibility 
for providing against old age rests primarily upon 
the individual himself or, at least, that it cannot 
fairly be placed upon the employer alone. They 
argue that, while the employer may elect to pro- 
vide for his superannuated workers when they 
have completed their service, he is under no moral 
obligation to do this. Some, furthermore, contend 
that any attempt to relieve the individual of his 
responsibility is certain to have a deteriorating 
influence upon private character, by diminishing 



PURPOSES OP PENSION SYSTEMS 7 

the qualities of self-reliance, thrift, and even 
self-respect. 

The general attitude of employers on this 
point is, perhaps, sufficiently indicated by the 
fact that the great majority of private pension 
plans now in operation in industrial establish- 
ments specifically deny any right on the worker's 
part to a retirement benefit, and place this on 
the basis of a gratuity. 

The argument that the employer is under a 
moral obligation to provide for the old age of 
his workers is reflected in the following excerpt 
from a discussion by Squier in his "Old Age De- 
pendency in the United States": * 

"From the standpoint of the whole system of 
social economy, no employer has a right to en- 
gage men in an occupation that exhausts the 
individual's industrial life in ten, twenty, or forty 
years; and then leave the remnant floating on 
society at large as a derelict at sea. From the 
standpoint of public economy, it is argued that 
every industry should be compelled to bear its 
own burden of waste, whether of material, ma- 
chinery, or human life; that it is as equally un- 
just and improvident for an industry to turn 
adrift its wornout and aged employees, to be taken 
up and housed at public expense in almshouses, 
as it is for the employee himself to stop work 
and become a tramp or vagrant." 

x Lee Welling Squier. "Old Age Dependency in the United 
States," pp. 272-3. 



8 INDUSTRIAL PENSION SYSTEMS 

A similar viewpoint has been expressed by 
many other writers on the pension problem. 

In an effort to assemble further opinion upon 
this question, an inquiry was submitted to a con- 
siderable number of economists, publicists, and 
social workers of the country, in the following 
form: 

"What is the moral obligation, if any, of the 
industrial employer towards his employees with 
respect to support in their old age?" 

A representative selection of the views thus 
obtained is presented herewith. 

Affirmative opinions. An affirmative position 
on this question was taken by John R. Commons, 
of the University of Wisconsin, as follows: 

"On the whole, I do not think that wage earn- 
ers, under existing conditions, can be expected 
to provide for old age. This is on account of 
the great uncertainties and insecurity of their 
work and the fact that they should be expected 
to support their children and give them an edu- 
cation, etc. 

"Considering these matters, I should say that 
there is a moral obligation on the individual em- 
ployer consisting in making some provision for 
his employees in old age, increasing with their 
length of service, but that there are limits to 
this obligation in individual cases and that the 
total obligation is a joint obligation upon indus- 



PURPOSES OF PENSION SYSTEMS 9 

try and upon the public which cannot be met 
except by legislation." 

Frank A. Fetter, of Princeton University: 

"If the old age of wage-earners is not other- 
wise provided for, the moral sense of our time 
surely recognizes that the obligation of the em- 
ployer has not been fully met in the case of 
workers who have grown old in his service." 

Several of those who took the ground that there 
was a moral obligation to provide for the super- 
annuation of industrial workers argued that the 
obligation could not fairly be placed upon the in- 
dividual employer but, rather, fell upon Industry 
as a whole. Thus, Franklin H. Giddings, of Co- 
lumbia University, said: 

"I cannot see that the individual employer is 
under any moral obligation to support his em- 
ployees in their old age by pension or otherwise. 
But I do think that the industry as a whole 
should for many reasons, many of them mere ex- 
pediencies, assume the obligation. By this I 
mean that the charge which the industry makes 
upon the public in the prices of goods should in 
the long run provide for the old age of employees 
who have been long connected with it and whose 
service has been faithful." 

William M. Leiserson, Chairman of the Labor 
Adjustment Board of the Rochester Clothing In- 
dustry, likewise, held that "there must be consid- 



10 INDUSTRIAL PENSION SYSTEMS 

erable doubt as to the moral obligation of an in- 
dividual employer toward his superannuated em- 
ployees; but there can be no doubt whatever 
that an industry has a distinct moral obligation 
not to throw on the scrap-heap men who have 
devoted their lives to the industry and have worn 
themselves out in its service." He suggested that 
the burden of a pension system might be too great 
for a small employer, but that in such cases an 
association of small employers in a given industry 
might distribute the burden in such a way as to 
make a pension system practicable. He con- 
tended, however, that "a large employer whose 
business forms a substantial portion of the in- 
dustry as a whole owes it to the workers whom 
he has drawn into the industry and who have 
dedicated their lives to it, that they shall be 
taken care of in their old age." 

Rev. John A. Ryan, D.D., Director of the 
National Catholic Welfare Council: 

"It is quite clear to me that industry, as a 
whole, is morally bound to provide the workers 
as a whole with sufficient income to meet not 
only present needs, but all the normal contin- 
gencies of life, including disability and old age. 
Whether this provision should all be made in 
the form of wages, leaving the employee to in- 
sure himself against all these contingencies, or 
whether the current wages should merely meet 



PURPOSES OF PENSION SYSTEMS 11 

current living costs, insurance to be provided 
by the industry, is a question of method rather 
than principle. 

"All this refers to industry as a whole. What 
the obligation of an individual concern is toward 
those persons that it has at any given time in its 
employ, is a more complex and difficult question, 
inasmuch as many of these employees have spent 
a greater or less portion of their working life in 
the employ of other concerns. Therefore, their 
present employer cannot fairly be required to 
make the whole provision for their future. The 
general principle seems to me clear enough, that 
the employer is under obligation to provide each 
of his employees during a given period, say, a 
year, with that amount of insurance for old age 
which is proportionate to the total amount of 
such necessary provision. For example, if the 
total working period of an employee is forty 
years, then the employer ought to provide one- 
fortieth of the total necessary old age pension 
every year." 

The various statements above given clearly 
contain a suggestion that the industrial employer 
or, at least, Industry as a whole, is under a 
moral obligation to provide for the support of 
superannuated employees. It should be noted 
that some of the opinions to this effect are 
qualified. 

Negative opinions. As opposed to the idea of a 
moral obligation, but not necessarily in opposi- 



12 INDUSTRIAL PENSION SYSTEMS 

tion to pension systems, the following statements 
may be cited: 

Dr. Arthur T. Hadley of Yale University: 

"The question what form the moral obligation 
of the employer should take regarding the pen- 
sion system involves the whole question of the 
structure of industrial society. 

"Under the old-fashioned system, where it was 
supposed to be each man's duty to save as far 
as he could, the idea prevailed in this country 
that the possible withholding of wages in order 
to provide a fund for a pension system was an 
unwarranted attempt to keep the employee un- 
der the guardianship of the employer; that the 
fullest right was done by paying the highest 
wages the market afforded, without any with- 
holding; and that all disability payments, from 
whatever cause, should be based on the needs of 
each particular case, rather than claimed as a 
right. 

"As long as most of the employees were am- 
bitious to become capitalists, and did save money, 
this worked well. The fact that they fail to feel 
this ambition or make these savings to-day is, 
however, an unfortunate fact with which we have 
to deal; and pension systems are one of the 
means by which we deal with it. I find it, how- 
ever, a little hard to speak of the moral obliga- 
tion to adopt a pension system, when the old 
system, under which we did not have to pay 
pensions at all, was better than the new one, 
when we utilize them to meet an evil which we 



PURPOSES OF PENSION SYSTEMS 13 

cannot deal with otherwise. I think we shall 
stand on clearer ground if we base our pension 
systems on expediency rather than on morals. " 

Henry W. Farnam of Yale University: 

"I do not hold that the individual employer 
has a moral obligation to support his employees 
in their old age. The mere fact that employees 
change so frequently in industrial establishments 
and that so few of them work for very many years 
in one place, would clearly make the obligation, 
if it existed, one to be borne by a number of dif- 
ferent employers; it would certainly be unfair to 
expect the last employer to bear the entire 
charge. 

"I look upon social insurance as a practical 
matter to be adopted in the interest of society 
as a whole and I therefore believe that the old 
age pension should be a social obligation to be 
financed by the worker himself, the employers as 
a group, and society as a whole through its tax- 
payers." 

T. N. Carver of Harvard University: 

"I have never heard or read a satisfactory argu- 
ment to show that the employer was under any 
moral obligation whatsoever in the matter of in- 
dustrial pensions. The reasons given have always 
seemed to me to be singularly inconclusive. I 
am inclined to think that the only sound reason 
on which to base a system of industrial pensions 
is a purely economic one. If the industry is likely 
to be permanent, or at least to outlast several 



14 INDUSTRIAL PENSION SYSTEMS 

generations of men, the management must decide 
whether they think it will pay in the long run 
to pension employees. If it will enable the in- 
dustry to secure and maintain a superior quality 
of employees and keep them in a frame of mind 
which will increase their usefulness and produc- 
tivity, that would furnish a valid ground for a 
pension system. That, I believe, is the one sat- 
isfactory argument in favor of pensions, or re- 
tiring allowances, for university professors. . . . 
This has always seemed to me a sufficient and 
satisfactory reason for a system of pensions, 
without bringing in the question of moral ob- 
ligation." 

Edward T. Devine, of the Association for Im- 
proving the Condition of the Poor, New York 
City, held that while it is desirable that Industry 
shall bear the burden of accidents and, to a large 
extent, the hazard of disability among workers, 
it should not be called upon to assume the bur- 
den of their support in old age. He contended 
that the responsibility of Industry in reference 
to old age lies chiefly in ensuring such conditions 
of work that employees will not become worn out 
before they should be, and in paying wages that 
permit the individual to make a provision against 
his superannuation. "Individuals who become 
dependent because of old age are, of course, a re- 
sponsibility for the community, but should not 
be a charge on Industry." 



PURPOSES OF PENSION SYSTEMS 15 

Many who oppose the idea that the employer 
is under a moral obligation to provide for super- 
annuated employees take the ground that the 
primary duty and, indeed, the full duty of the 
employer is to pay adequate wages and that when 
this is done workers may properly be required 
to care for themselves in old age. This viewpoint 
is illustrated in the following statement by W. Z. 
Ripley, of Harvard University: 

"My predilection is all for such recognition 
of the workers' rights in adequate wages as shall 
force him to meet the problem of old age for 
himself. I conceive that the coddling process 
softens both the fiber of the employee and of 
the employer. It tempts the employer to seek 
welfare as an alternative for paying full measure 
of wages, and it leads the employee to lean upon 
a beneficent despot who shall protect him against 
the shocks of adversity. Consequently I person- 
ally reject the conception of moral obligation, but 
would substitute for it what seems to me a more 
virile view, that wage relationships should be es- 
tablished in the light of mutual respect and even 
apprehension upon a level which will permit the 
workers to take care of themselves." 

Miss Julia C. Lathrop, former Chief, Children's 
Bureau, U. S. Department of Labor: 

"It appears to me clear that the obligation of 
the employer ceases when he has paid an ade- 
quate wage, by which is understood a wage per- 



16 INDUSTRIAL PENSION SYSTEMS 

mitting decent living and a reasonable margin 
for savings during the period of employment, ex- 
cept as he may be joined with the employee and 
the State in a system of retirement or old age 



The following statement by W. E. H. Lecky, 
while dealing with general old age pensions, may 
fairly be cited in this connection: 1 

"There is no real ground for the assertion that 
because an industrious man has failed to earn a 
sufficiency, he has a moral right to be rewarded 
for his industry out of the proceeds of a tax levied 
upon his neighbors, to whom he has rendered no 
service, or none which has not been paid for in 
wages." 

It should be repeated that the above state- 
ments do not necessarily mean that these writers 
condemn pension systems. The question at the 
moment is whether the employer is under a moral 
obligation to provide for the superannuation of 
his employees. One may reject the concept of 
a moral obligation, yet advocate a pension sys- 
tem on other grounds. 

Thus John A. Fitch, a well-known writer on 
labor matters, expressed the opinion that the 
problem of old age dependency is a "social in- 
stead of an industrial problem, and that the only 

*W. E. H. Lecky. "Old Age Pensions: Collection of Short 
Papers," p. 103. 



PURPOSES OF PENSION SYSTEMS 17 

proper solution of the question is a government 
pension." Since, however, this was not likely to 
come in the immediate future and since, in the 
meantime, employers are confronted with the 
problem of superannuation, he held that employ- 
ers were not only justified, but wise, in establish- 
ing pension systems. A particular reason for 
this was that when an employer "gets stability 
in addition to day's work, he has received a value 
over and above what he has paid for through 
the wage." 

A fair summarization of these divergent views 
is that, on the whole, pensions are a matter of 
expediency rather than of moral obligation, and 
that in so far as an employer feels under com- 
pulsion to provide for the old age of his 
workers, this arises from humanitarian con- 
siderations engendered by association, rather 
than from the existence of a definite right 
on the workers' part. It will be noted 
that several of those who maintain that a 
moral obligation exists hold that this does not 
fall solely on the individual employer, but on 
Industry in general, or upon employers, em- 
ployees, and the public jointly. 

If the theory of a moral obligation on the part 
of the employer holds anywhere, it would seem 
obvious that it should obtain in the case of the 



18 INDUSTRIAL PENSION SYSTEMS 

Government as employer. Yet most disinterested 
students of governmental pension systems reject 
the idea of obligation and base their advocacy of 
such systems on the practical ground of expe- 
diency. Thus, one writer on government pension 
systems has said: 

"Sentimental arguments are sometimes ad- 
vanced to prove that the Government owes some 
special charity to the men who have grown gray 
in its service. . . . They are no more entitled 
to public charity and benevolence than men who 
have grown gray in some private capacity. Pub- 
lic contributions to a retirement system are to be 
justified, not on any ground of benevolence or 
philanthropy, but on the ground that they are 
payments to improve the character of the ser- 
vice." * 

Attitude of Labor in general toward private 
pension systems. Perhaps the most convincing ar- 
gument on this point is found in the attitude of 
Labor itself. One of the significant facts of the 
pension problem is that the demand for pension 
systems comes from the employer and from the 
public rather than from the worker. At best, 
the attitude of Labor toward pensions is one of 
comparative indifference. It is true that employ- 
ers who have inaugurated pension systems often 

1 Lewis Meriam. "Principles Governing the Retirement of 
Public Employees," pp. 16 and 17. 



PURPOSES OF PENSION SYSTEMS 19 

have received expressions of appreciation from 
the recipients of the pension benefits. Replies 
from a large number of employers as to the at- 
titude of their workers were secured in the course 
of this study. Representative statements on this 
point are given below: 

"The plan has been well received by the em- 
ployees, and that it is highly appreciated is evi- 
denced by the many letters received from grate- 
ful beneficiaries." 

"Our opinion of the plan is that it is well re- 
ceived and appreciated by the employees, par- 
ticularly those who have been with the company 
for a number of years and who are approaching 
the age of retirement." 

"We know that our employees, particularly 
those who are no longer young, are very favor- 
ably impressed with our pension system." 

"Our pension system is very much appreciated 
by all classes of workers. They know it is a re- 
ward for faithful service and all apparently fully 
appreciate its advantages." 

"We believe our annuity plan is contributing 
in making our personnel happy and contented, 
although you will, of course, realize that this plan 
is but one feature of our general policy." 

On their face these statements indicate decided 
appreciation. But the fact that such apprecia- 
tion is seldom reflected in a reduced labor turn- 



20 INDUSTRIAL PENSION SYSTEMS 

over, 1 which would be its most natural expres- 
sion, robs this evidence of much of its apparent 
significance. 

At least it is certain that Labor has conducted 
no active campaign to secure the inauguration of 
private pension systems. Instead, the almost 
universal attitude of Labor may be found in some 
such slogan as "Give it to us in the pay envelope," 
or "Labor wants justice, not pensions." 

This attitude of Labor towards private pen- 
sion systems is further illustrated by the following 
extract from testimony before a British Retire- 
ment Commission: 

"We have a number of artisans who, about five 
years ago, petitioned that they might be put en- 
tirely upon trades union rate of wages and the 
option was given to them, either to remain under 
the terms they were with pensions or to go at once 
to trade union terms, and these four hundred men 
elected to have a larger immediate salary and 
forego all the rights to pension and sick pay and 
that kind of thing." 2 

This feeling is, moreover, characteristic of sal- 
aried workers, as well as of wage-earners. This 
is indicated by the following result of a vote of 

1 See p. 37. 

2 Sir J. McDougal, of the London County Council, testifying 
before the British Royal Commission of Superannuation in 
the Civil Service, British Parliamentary Papers, 1903, Vol. 
XXXIII, p. 138. 



PURPOSES OF PENSION SYSTEMS 21 

employees of the State, War, Navy, and Treasury 
Departments at Washington in 1911: 

For immediate increase in salaries inde- 
pendent of any retirement or pension 
legislation 7,459 

For immediate provision for increase in 
salaries accompanied by straight pen- 
sions provided wholly by the Gov- 
ernment 1j465 

For immediate provision for increase in 
salaries accompanied by retirement 
on annuities provided by compulsory 
savings by employees 1,067 

For immediate provision for retirement 
on straight pension provided wholly 
by the department 317 

For immediate provision for retirement 
on annuities provided by compulsory 
savings by employees 186 

10,494 

Attitude of Organized Labor. The attitude of 
Organized Labor toward private pension systems 
is, at least in many cases, not merely one of in- 
difference, but of definite hostility. In this con- 
nection the following statement by Samuel 
Gompers, president of the American Federation 
of Labor, obtained in the course of this study, 
may be noted: 



22 INDUSTRIAL PENSION SYSTEMS 

"Paternalism either in government or in in- 
dustry is abhorrent. It takes away the initiative 
of the workers who should themselves prepare for 
old age or the proverbial 'rainy day.' Where the 
workers receive an adequate wage, one that will 
permit them to live as an American should live, 
they will provide their own pension system, and 
whatever men do for themselves increases their 
value as workers. It brings independence and a 
desire to live as men should live without fear of 
losing that which will protect them in their old 
age." 1 

The head of a local labor union expressed a 
similar point of view as follows: 

"What the workers want is a sufficient wage 
so that they can pay for their own protection 
without charity either from employers or any 
one else. Labor does not believe in industrial 
welfare work of any kind, because it is done with 
the direct intention of weakening the power of 
organized labor. 

"It is not right that a man should go without 
the full pay he might receive unless he stays with 
one company. 

"The cause of unrest is not the monotony of 
modern industrial employment, but the helpless- 
ness of the men in having no say as to how they 

1 Organized Labor, however, has shown no such aversion to 
governmental pensions. Again, to quote Mr. Gompers: 

"Until the Government itself establishes an old age pension 
system, labor will insist that pension systems shall be con- 
trolled by the workers themselves, without any connection 
whatever with the employers." 



PURPOSES OF PENSION SYSTEMS 23 

shall regulate their lives. A man should be free 
to go from one firm to another without jeopar- 
dizing his right to protection in his old age. 

"A pension scheme with a right to withdraw 
the 'accrued credits' in case of separation from 
an employer, would meet many, but not all, the 
objections to pensions in general." 

While these statements can be taken as rep- 
resenting the attitude of Organized Labor, the 
question may fairly be raised whether in its 
fundamental aspects the psychology of Organized 
Labor differs essentially from that of Labor in 
general. 1 

If provision against superannuation were a 
definite moral obligation of the employer, it is 
reasonably certain that Labor would be quick 
to sense it and to demand its fulfillment. 

For all these reasons, therefore, it seems clear 

s As a further indication of the attitude of Organized Labor 
towards private industrial pension systems, an experience some 
years ago with a proposal to inaugurate a pension plan for 
the organized brewery workers of the country may be cited. 
The plan recommended was of the contributory type, under 
which employees would contribute only one-half of one per 
cent of their wages and the employers a sum equivalent to 
one and a half per cent. After careful consideration by the 
officials of the brewery workers' unions, the proposition was 
submitted to a referendum vote by individual unions and 
sections of the country, a period of one month being allowed 
for discussion and another month for voting. The result was 
the rejection of the plan by a vote of 22,936 to 12,888. (E. B. 
Phelps. "American Brewery-Workers' Surprising Rejection of 
Their Proffered Workmen's Compensation and Old Age Pen- 
sions.— A Clean-Cut Case of The Consciousness of Kind/ ") 



24 INDUSTRIAL PENSION SYSTEMS 

that the individual employer, while conscious of 
a certain sense of compunction in the case of 
workers who have spent a lifetime in his service, 
is under no compelling moral obligation to pro- 
vide for their superannuation. The practical 
problem of dealing with superannuation, how- 
ever, still remains. 

Pensions as a reward for long service 
The conception of pensions as a reward for 
service, while closely related to that just dis- 
cussed, is distinguished from it in many respects: 
It takes no account of the necessities of the 
worker, but, ostensibly at least, pensions alike 
all, whether self-supporting or dependent, who 
have rendered a given length of service to the es- 
tablishment, or who have fulfilled certain pre- 
scribed conditions. Furthermore, it does not 
necessarily require continuance in service until 
the employee actually is superannuated. Under 
many plans an employee who commences work 
at an early age may retire on pension before he 
can really be termed old, if he has served the re- 
quired number of years. 

The idea of "reward of service" is present in 
most modern pension systems. However, as will 
be shown in more detail later, the reward often 
is subject to many conditions. 



PURPOSES OF PENSION SYSTEMS 25 

As a straight reward of service most pension 
systems are grossly inadequate. The percentage 
of workers who go on the pension roll usually 
is only a small fraction of the total force, or even 
of those remaining with a company for long 
periods. Oftentimes it is almost negligible. 
Moreover, such systems easily become highly in- 
equitable as between individual workers. An 
employee who happens to have completed, say, 
twenty or twenty-five years of service may get 
a pension, the "present value" of which may be 
thousands of dollars, while another worker, per- 
haps more efficient and more faithful, but who 
has just failed of completing the required period 
of service, may get absolutely nothing. If long 
service is entitled to a reward, then it would seem 
that a system which pays a large benefit for, say, 
twenty years' service, but pays nothing for nine- 
teen years' service, is inherently defective. 

A further objection often advanced against the 
"re ward-of -service" idea, as actually operative in 
many pension plans, is that it may put a pre- 
mium on inefficiency by keeping men in service, 
the retirement of whom should be the primary 
purpose of a pension system. For example, a 
humane executive may be tempted to retain on 
his force a worker who needs only one or two 
more years of service to entitle hini to a pension, 



26 INDUSTRIAL PENSION SYSTEMS 

even though that worker has become distinctly 
inefficient. Paradoxical as it may be, a pension 
system may thus defeat what is perhaps its most 
important aim. On the other hand, a heartless 
factory executive may dismiss an efficient man 
approaching the retirement age, in order to save 
the company the cost of maintaining him later 
on pension. 

Still again, it has happened that where the cost 
of pensions was rapidly mounting, the terms of 
the plan itself have been changed, with the result 
that many workers have been deprived of the 
pension benefit to which they had been looking 
forward. 1 

Another objection of a somewhat different sort 
urged against the "reward-of-service" theory is 
that it may be interpreted to mean that a worker 
who has rendered a given number of years of ser- 
vice is entitled to support, even though still able 
to work. This theory has resulted, in the case of 
some public service pension systems, in the pay- 
ment of liberal pensions to men still in the prime 
of life, who have at once engaged in other lines 
of activity where their pensions have given them 
an important advantage from a competitive 
standpoint. It seems clear that the expenditure 
of public funds to pay pensions to men still far 

1 In this connection, see p. 169, 



PURPOSES OF PENSION SYSTEMS 27 

from the point of superannuation, and who are 
still able to work, is wholly indefensible. In 
private industry the practice would likewise be 
objectionable. As a practical matter, in most 
private industrial pension systems the service re- 
quirement is so linked up with a stipulated age 
that a worker would seldom be able to secure a 
pension while still in middle life. Some private 
systems, however, permit retirement after long 
service, irrespective of age. 

The idea has sometimes been advanced that a 
pension system is intended to assure the worker 
a period of comfortable ease in his declining 
years. This conception of a pension system has 
been vigorously condemned by one writer as 
follows: 

"Employees must be on their guard against 
those of their leaders who adopt the view that the 
purpose of a retirement system is to reward 
faithful servants with a 'chance to rest/ and that 
the conditions established . . . should be 
placed sufficiently low so that 'we may get our 
pensions while we are still young enough to enjoy 
them.' That is not only wrong philosophy re- 
garding the nature of a retirement system; it is 
a wrong philosophy regarding life." * 

The "reward-of-service" theory tacitly admits 
that workers rendering unusually long service 

1 Lewis Meriam. "Principles Governing the Retirement of 
Public Employees," p. 399. 



28 INDUSTRIAL PENSION SYSTEMS 

have not been fully paid during their active work- 
ing careers. Under such a theory it is at least 
incumbent upon the employer to make the as- 
surance of the payment certain; it would also 
seem that under this theory the reward should 
take account of all service of special length and 
not be dependent upon the fortunate accident 
that the worker shall complete a service period 
of extraordinary length. 

If the "reward-of-service" theory be accepted 
as a primary reason for establishing a retirement 
system, there appears to be a far better method of 
meeting it. This matter is discussed in detail 
in Chapter V. Certainly this object is not ade- 
quately met by the ordinary non-contributory 1 
pension system. 

Pensions as a means of increasing efficiency 
We come now to the third conception of pen- 
sion systems specified on page 4, namely, their 
use as a means of increasing efficiency, either by 
humanely getting rid of workers who have be- 
come superannuated, or by stimulating the inter- 
est and effort of the active force. 

This is one of the primary motives which have 
led to the establishment of pension systems. A 
pension system, it is urged, tends to relieve the 

1 See p. 47. 



PURPOSES OF PENSION SYSTEMS 29 

employer of any compunction which he may feel 
over the dismissal of a worker grown old in his 
service and now without means, and thus more 
readily enables him to increase the efficiency of 
his working force by weeding out those no longer 
able to perform their allotted tasks. The "drag" 
of such workers upon production is well known 
to all industrial executives. It is extremely 
wasteful to permit a superannuated worker to 
continue at a task where his inefficiency means 
a lower output not only for himself, but for all 
others associated with him in the operation. In 
some cases, notably in work of a "line" character, 
it is imperative that such a worker shall not be 
retained, at least in the particular position. 
Many establishments have endeavored to meet 
this difficulty by finding other tasks of a lighter 
or less exacting character, to which such older 
workers are assigned. But the opportunities of 
this sort often are far too few to take care of 
the increasing number of superannuated work- 
ers. The employer has, therefore, resorted to the 
expedient of a pension system in order to enable 
him to dismiss such workers without raising any 
question of injustice or of adverse reaction on the 
other employees. 

This broad underlying phase of the pension 
movement is suggested by the following state- 



30 INDUSTRIAL PENSION SYSTEMS 

ment from the Massachusetts Commission on Old 
Age Pensions, Annuities, and Insurance. 1 

"The problem of dealing with the aged em- 
ployee is an urgent one in the modern business 
world. ... To carry them on the payroll at 
their regular employment means waste and disor- 
ganization of the working force; to turn them 
adrift is not humane. In the past, large employ- 
ers of labor have tried to meet this difficulty in 
piecemeal fashion by retiring aged employees on 
pension in certain cases, or giving them light 
work, each case being provided for separately, on 
its own merits; now they are beginning to deal 
with the problem in a systematic fashion, by 
adopting a uniform method of retirement with 
pension." 

Of all the purposes which have led to the es- 
tablishment of industrial pension systems this is, 
perhaps, most easily justified. In the case of the 
public service, it is the one paramount justifica- 
tion for inaugurating a pension system. As one 
writer has said: 

"Every reason for establishing a retirement 
system thus far advanced can be summarized un- 
der the single broad heading of the improvement 
of the public service and, in fact, that is the only 

1 Report of the Massachusetts Commission on Old Age Pen- 
sions, Annuities, and Insurance, 1910, pp. 136-137. 

It should be noted that two state commissions in Massa- 
chusetts have investigated the pension problem. The second 
was known as the Massachusetts Commission on Pensions, and 
its' report was issued in 1914. 



PURPOSES OF PENSION SYSTEMS 31 

reason why the Government should establish one 
in its own interests." * 

Without a retirement system, it is urged, the 
public official is tempted to continue workers 
who in private establishments would be dis- 
missed. A special reason for this is that ordi- 
narily a government executive is under no such 
pressure to "show results" as is the manager of 
an industrial plant. It is, indeed, notorious that 
the government service includes many who are 
incapacitated and superannuated, and whose sal- 
aries are in reality little more than pensions, 
while, in addition, the Government is incurring a 
heavy overhead expense on their account. 

Yet, as a matter of fact, there is grave danger 
that certain types of pension systems may not 
result in thus increasing efficiency through the 
removal of the superannuated. A report of the 
United States Commission on Economy and Ef- 
ficiency, submitted to the President of the United 
States in 1910, indeed, maintained that a non- 
contributory 2 pension system in the case of gov- 
ernment service operated to retain poor em- 
ployees rather than to keep up the standard of 
-efficiency. It argued that "in case the inef- 

1 Lewis Meriam. "Principles Governing the Retirement of 
Public Employees," p. 16. 

2 See p. 47. 



32 INDUSTRIAL PENSION SYSTEMS 

ficient employee is working under a pension sys- 
tem whereby he is entitled, on reaching a certain 
age, to retire on a competence, the head of the 
office will be all the more reluctant to dismiss 
him before he reaches that age." 

The Commission held that a pension system 
"has exactly the opposite effect where the private 
corporation is the employer," since the adminis- 
trative head of the office is in self-defense 
"obliged to hold up every subordinate to the high- 
est standard of efficiency and to stifle any feel- 
ing of humanity or sympathy which might other- 
wise tempt him to show leniency." 

Without attempting to analyze this point in 
detail, it may be concluded as almost axiomatic 
that a private employer will have less compunc- 
tion about dismissing superannuated workers if 
he knows that their remaining years are provided 
for by some retirement system than he will have if 
he knows that they are likely to become objects of 
charity. The failure of many pension systems to 
accomplish the removal of superannuated workers 
effectively often is due to the fact that the system 
is of a defective type or contains defective pro- 
visions, or to faulty administration, rather than 
to an inherent vice in the principle of the retire- 
ment benefit itself. 

It may be concluded, therefore, that the prob- 



PURPOSES OF PENSION SYSTEMS 33 

lem of maintaining efficiency by the removal of 
workers no longer able to perform their tasks 
should be facilitated by the inauguration of a 
proper retirement system. As noted later, this 
alone may not be a sufficient justification for such 
a system. 

Pensions as a means of increasing efficiency of 
the active force. In distinction from increasing 
efficiency through elimination of the superannu- 
ated, it is often claimed that pension systems 
increase the efficiency of the active force. As al- 
ready pointed out, the very fact that superan- 
nuated workers are thus provided for may exert 
a favorable influence upon the active members of 
the force and increase their good will, and thus 
perhaps their efficiency as well. Again, to the 
extent that a pension system relieves the worker 
during the stress period of life of anxiety over 
his declining years, he is, it is urged, in better 
condition, mentally and physically, to perform 
his daily tasks. 

The same view is found in the following state- 
ment in the Report of the Massachusetts Com- 
mission for 1910: 

"The economic gain from the pension system 
is twofold: it eliminates the waste and demorali- 
zation attendant upon the continued employment 
of old men who have outlived their usefulness; 



34 INDUSTRIAL PENSION SYSTEMS 

and it helps to promote industry, contentment, 
and loyalty on the part of the working force. 
The pension system aids in solving the difficult 
problem of stimulating the employees of a large 
corporation to the highest efficiency." * 

This argument, while plausible, is open to seri- 
ous question. In sharp contrast with the view of 
the first Pension Commission of Massachusetts 
just cited, it may be noted that the second Com- 
mission on Pensions of that state discredited the 
idea that a pension system was an incentive to 
efficiency of the active working force and, instead, 
concluded as follows: 

"The Commission finds that only by the re- 
tirement of the superannuated does a pension sys- 
tem improve the efficiency of the public service." 2 

Replies received from numerous employers to 
an inquiry on this point during the course of 
this study suggest that the inauguration of pen- 
sion systems was sometimes followed by an in- 
crease in efficiency, but they by no means present 
convincing evidence of this as a general rule. 

A representative selection of these views fol- 
lows: 

"We feel that our pension plan is largely in- 
strumental in increasing efficiency." 

1 Massachusetts Commission on Old Age Pensions, Annuities, 
and Insurance, 1910 Report, p. 138. 

2 Not italicized in original. 



PURPOSES OF PENSION SYSTEMS 35 

"We feel that the pension helps efficiency of 
service, but it is very difficult to give anything 
definite in regard to the effect of the pension 
only/' 

"We know of nothing which we are doing which 
has a greater effect on the morale of the organi- 
zation than our pension system." 

"We find that our older employees consider 
their pension rights in the nature of an insur- 
ance, which, no doubt, has some influence in . . . 
securing their efficiency." 

"Operating alongside of our Employees' Sav- 
ing and Profit Sharing System, our Employees' 
Benefit Association, and more recently, in con- 
junction with our Industrial Council Plan of em- 
ployee representation, it is safe to say that the 
broad effect of the Pension Plan is distinctly 
beneficial." 

"We do not feel that we can expect it [the 
pension system] to produce any very noticeable 
results in the way of . . . efficiency." 

"We do not believe that the inauguration of 
the pension fund has had any effect on . . . ef- 
ficiency." 

That pension systems do not materially in- 
crease efficiency of the active force was the con- 
clusion reached by the Industrial Bureau of the 
Merchants' Association of New York, based upon 
a study of private pension systems made in 19 19. 1 

1 "Industrial Pensions." Merchants' Association of New- 
York, 1920, p. 30. 



36 INDUSTRIAL PENSION SYSTEMS 

Analyzing the replies of fifty-nine employers with 
respect to the effect on efficiency, the report in 
question said: 

"These replies show that the claim that pension 
systems bring about increased efficiency by in- 
creasing appreciation and loyalty of employees 
and by eliminating their worries is without much 
foundation. Nearly twenty per cent of the em- 
ployers questioned are certain no increased ef- 
ficiency results, while as many more believe that 
probably such is the case. Furthermore, very 
few of the nineteen employers (less than one- 
third of those replying) who believe that in- 
creased efficiency has resulted appear to base such 
belief on facts and some admit that, while they 
feel sure the increased efficiency is present, there 
are no tangible evidences of it. 

"This failure to produce increased efficiency 
can be traced to the fact that, in general, pension 
systems appeal only to employees who have 
grown old in their present employment. These 
employees usually constitute a relatively unim- 
portant part of the entire working force and their 
habits of efficiency, like all other habits, have be- 
come more or less fixed." 

In any event, the effect of a pension system 
on the efficiency of the active force will depend 
largely upon the terms of the plan, partly upon 
its certainty from the viewpoint of the employee, 
partly upon the character of the employee, and 
very largely upon his age. That it will not be 



PURPOSES OF PENSION SYSTEMS 37 

an important factor in the case of the younger 
workers is practically certain. 

Pensions as a Means of Reducing Labor Turnover V 

A hope that pension systems will reduce the 
enormous labor turnover so characteristic of mod- 
ern industry undoubtedly has been one chief 
reason for their establishment. Yet on this point 
it is possible to say with assurance that such sys- 
tems are disappointing. The testimony of nearly 
all employers who have introduced pension sys- 
tems is that the effect upon labor turnover in the 
case of workers under middle age is small, and 
often negligible. For workers nearing the retire- 
ment age the prospect of a pension apparently is 
a decided incentive to continuance in the service. 
But the very fact that workers have remained in 
a given establishment until such age is of itself 
evidence that they would be likely to continue if 
there were no pension system. There is the 
further practical consideration that the worker 
past middle age has sufficient inducement to con- 
tinue merely because of the difficulty involved in 
finding a new position. The reluctance of Indus- 
try to employ men over fifty years of age, or 
even somewhat under that age, is proverbial. 

Statements on this point were obtained from 
a considerable number of employers. While at 



38 INDUSTRIAL PENSION SYSTEMS 

first sight they appear to show a reduction in 
labor turnover, careful analysis indicates that this 
was, in nearly all cases, confined to older work- 
ers. An official of one large industrial company 
stated : 

"I believe that the restraining influence on 
labor turnover of the pension system is practic- 
ally negligible in the case of workers less than 
fifty years of age." 

Other representative statements on this point 
are given below: 

"We believe that this policy, in connection with 
our death benefit system and safety and welfare 
work ... is something of an incentive in holding 
their loyalty." 

"As to the further results of the system, we 
feel that with those employees who remain with 
the company for a number of years, looking for- 
ward to the possibility of a pension has consider- 
able influence in reducing the turnover, but with 
more recent employees it has very little of any 
such effect." 

"After a man reaches the age of fifty or so and 
has been with us for a considerable time, we have 
no doubt that the pension plan tends to tie him 
to us. The pension plan, however, has little in- 
fluence upon the real problem of labor turn- 
over." 

"The labor turnover at our mine operations is 
such that we have felt that the matter of pen- 



PURPOSES OF PENSION SYSTEMS 39 

sions is given very little consideration by our men, 
except possibly the employees who hold the more 
important positions." 

"We do not believe that group insurance with- 
out pension or endowment features, or a pension 
plan which does not provide for a death benefit 
in some way, will accomplish very much in the 
long run, but we are convinced by our experience 
that a plan under which reasonable death, dis- 
ability, and pension benefits are provided, will 
do a great deal to increase the . . . continuity of 
service." 

These statements more or less accurately reflect 
the general consensus of opinion on this subject. 1 

It may safely be asserted, therefore, that the 
employer who inaugurates a pension system pri- 
marily for the purpose of reducing labor turnover 
ordinarily will be disappointed. Certainly the 
prospect of such a result is not sufficient warrant 
for assuming the burden and expense of a pension 
system. 

Furthermore, some disinterested students of 
the labor problem hold that a considerable labor 

x The Report of the Industrial Bureau of the Merchants' 
Association of New York, previously cited, said on this point: 

"As might be expected from the fact that pension systems 
do not in general create appreciation, loyalty, and efficiency, 
neither do they develop materially permanence of employment 
except with the older employees. In this connection it occurs 
to one that labor turnover is ordinarily very small among 
middle-aged employees who have worked for a number of 
years for their present employer." 



40 INDUSTRIAL PENSION SYSTEMS 

turnover is by no means undesirable, but even 
that it is essential in order to enable workers to 
find their proper niche in industry. The use of 
pension systems to interfere with the mobility 
of labor has often been condemned as an attempt 
to "chain the worker to his job." 

Organized Labor has repeatedly objected to 
private pension systems on this ground, and on 
the further ground that they have been insti- 
tuted in order to prevent or hinder unionization. 
Thus Samuel Gompers, in a statement secured 
during the course of this study, said: 

"Labor does not believe in pensions given by 
the employer. Old age pensions were established 
by a number of railroad companies, not for the 
benefit of their employees primarily, but for the 
influence they might have on discouraging or- 
ganization. . . . 

"Where an employer establishes a pension sys- 
tem, it can be traced to the hope that it will 
prevent the organization of the employees into 
trade unions. There is no case on record where 
the employees are union men that pensions are 
paid. It is only in non-union plants or indus- 
tries that the pension system can be found. . . . 

"Another idea behind the payment of pensions 
is to prevent the enormous turnover in non-union 
shops where the wages and working conditions 
are undesirable. The employers believe that the 
hope of receiving a pension some time in the dis- 



PURPOSES OF PENSION SYSTEMS 41 

tant future will influence the workers to accept 
low wages and disagreeable conditions of em- 
ployment. . . . 

"Only the autocrats in industry, the employers 
who fix the wages, hours of employment, and 
working conditions of the workers, believe in 
profit sharing as well as pensions. Until the 
Government itself establishes an old age pension 
system, labor will insist that pension systems 
shall be controlled by the workers themselves 
without any connection whatever with the em- 
ployers. ... No system should be devised that 
will tie men to their jobs, and the object of the 
pensions when established in non-union shops is 
to compel them to accept whatever wages and 
conditions of employment are forced upon 
them. . . . 

"Labor therefore refuses to place in the hands 
of employers a weapon that can take away from 
workers at the last moment any benefit that de- 
pends upon their servility." 

While exception could easily be taken to many 
of the contentions in this statement, it may be 
regarded as an illustration of the position of a 
large section of Organized Labor towards private 
pension systems. 

Pensions as a Means of Disciplinary Control 
In many cases, one motive in establishing 
pension systems has been a desire to control and 
discipline workers. This is particularly true with 



42 INDUSTRIAL PENSION SYSTEMS 

respect to strikes. Many employers have argued 
that an employee who may lose his pension if he 
goes on strike, joins a union, or engages in other 
activities displeasing to the management, will 
carefully count the cost. 

This purpose of pensions has been stated by 
one writer as follows: 

"The pension attaches the employees to the 
service and thus decreases the liability to 
strike. . . . 

"When employees realize that unsatisfactory 
conduct may at any time lose them not only their 
present position, a loss which in such a labor 
market as ours might be easily made good, but 
that it entails further the loss of a very valuable 
asset — the employee's right to a pension — the in- 
centive to good conduct is greatly increased." 1 

This view is clearly reflected in some of the 
pension plans now in actual operation. For in- 
stance, such provisions as the following are not 
uncommon in "discretionary" plans: 

"A pension may be withheld or terminated in 
case of misconduct on the part of the beneficiary 
or for other cause sufficient in the judgment of 
the Board to warrant such action." 

"Discontinuance of regular work without per- 
mission for any other reason than sickness or ac- 

*F. A. Vanderlip. "Insurance for Workingmen." North 
American Review, December, 1915. 



PURPOSES OF PENSION SYSTEMS 43 

cident, may at the discretion of the Committee be 
deemed sufficient cause for the forfeiture of all 
benefits accruing under this plan." 

Here, again, practical experience indicates that 
any such expectations from a pension system are 
doomed to disappointment. Strikes have fre- 
quently occurred in establishments where pension 
systems are in force. The experience of railroad 
companies, several of which have long-established 
pension systems, is an illuminating example of 
their ineffectiveness in avoiding labor troubles. 

Even if a pension system succeeds in prevent- 
ing men from going on strike, the fact that they 
have been deterred from doing so under virtual 
compulsion may engender an amount of ill feel- 
ing which will more than nullify any beneficial 
effects of the system. 

The use of a pension system for disciplinary 
purposes is, indeed, essentially its use as a club. 
The pension promise is in effect distorted into a 
threat. If one purpose of a pension system is to 
increase good will — and it is difficult to see how 
this purpose can be absent — certainly this result 
cannot be hoped for where the system is per- 
verted into an engine of repression, oppression, 
or discipline. 

Much of the hostility on the part of Labor 
toward private industrial pension systems appar- 



44 INDUSTRIAL PENSION SYSTEMS 

entry can be traced to the belief, or fear, that they 
are likely to be used for such disciplinary pur- 
poses. 

Squier, in his book already quoted, 1 says on 
this point: 

"That which the more thoughtful of the wage- 
earners themselves urge against a pension plan 
is that it restricts, even to the point of preven- 
tion, the mobility of labor. . . . 

"Another objection more frequently urged by 
the laboring class against this system is that the 
employee becomes a sort of chattel property of 
the employer. The latter is free to discharge 
him, cut down his wages, or to shift him from 
an agreeable to an undesirable line of work. He 
must submit without resistance." 

One prominent writer who has criticized the 
use of pension systems for disciplinary purposes, 
has characterized "discretionary" systems 2 as "the 
new peonage." In this connection he said: 

"A pension system with such features must 
either prove a delusive protection or operate as 
a bribe to induce the wage-earner to submit to 
a new form of subjection to the corporation. . . . 

"Employers seek to justify provisions in the 
pension systems like those quoted above by the 
fact that the pension fund is contributed wholly 

'"Old Age Dependency in the United States," pp. 278-280. 
2 See p. 47. 



PURPOSES OF PENSION SYSTEMS 45 

by the employer. But this fact furnishes no jus- 
tification. The employer should not be per- 
mitted, even at his own expense, to establish a 
pension system which tends to rob the working- 
man of his little remaining industrial liberty." x 

Conclusions as to Proper Purposes of a Pension 
System 

To epitomize the preceding discussion it may 
be concluded that a private employer is under 
no compelling moral obligation to provide for the 
support of his superannuated employees in their 
old age. Nor can a pension system primarily be 
regarded as a method of rewarding faithful ser- 
vice, although this purpose may be present. It 
may further be concluded that the prospect of 
reducing labor turnover, or of exercising disci- 
plinary control over workers, does not promise 
results of sufficient importance to warrant the ex- 
pense of a pension system, while the latter pur- 
pose is in many respects inherently objectionable. 

It follows, therefore, that the one controlling 
justification of a pension system from the em- 
ployer's standpoint is that it will increase ef- 
ficiency, primarily through elimination of super- 
annuated and incapacitated workers, and possi- 
bly by building up a larger amount of good will 
and interest among the active force. Although 

1 Louis D. Brandeis. "Business a Profession," pp. 75-76. 



46 INDUSTRIAL PENSION SYSTEMS 

some of the other purposes discussed are im- 
portant, they are incidental to the primary ob- 
ject of increasing efficiency. 

While in many cases it is doubtful whether such 
efficiency is attained, this failure may be due to 
imperfections in the plan or to errors in admin- 
istration. A sound retirement system should fa- 
cilitate the problem of dismissing superannuated 
and dependent workers. There may also be some 
increase in the efficiency of the active force, but 
the evidence on this point is by no means con- 
vincing. 

To the extent that a pension system does ac- 
tually increase efficiency, it merits most careful 
consideration. 

Increase in efficiency, however, is not in itself 
a complete justification of a pension system. Not 
only must a pension system be effective, but it 
must be inherently sound and equitable, and must 
not produce consequences injurious to the worker 
or to society as a whole. In order to determine 
the facts on these important points, it is essential 
to take up the discussion by distinctive types of 
pension systems. 

Types of Pension Systems 

Before proceeding to this analysis it will be 
convenient to define briefly the principal types 



PURPOSES OF PENSION SYSTEMS 47 

of private pension systems. These are three in 
number, as follows: 

1. The non-contributory "discretionary" sys- 
tem; 

2. The non-contributory "limited-contractual" 
system; 1 

3. The contributory system. 

In pension systems of the first type the cost 
is, at least ostensibly, 2 borne by the employer, 
the employee making no direct contribution. 
The employer, moreover, has complete discretion, 
not only as to the general provisions of the plan 
and the amount of the benefit, but also as to the 
continuance of the system, or even the continu- 
ance of a pension which has once been entered 
upon. Such "discretionary" systems specifically 
deny the existence of any contractual right on 
the worker's part and, as a result, provide for 
no benefit to a worker quitting the service or 
dismissed before reaching the retirement age. 
They may, or may not, include a death bene- 
fit. 

In pensions of the second type the contribu- 
tions are likewise made exclusively by the em- 
ployer who, again, retains practically complete 
discretion except that, once a pension has been 

J This designation is not in common use, but has been 
adopted as a convenient one for the purpose of this report, 
2 See p. 53. 



48 INDUSTRIAL PENSION SYSTEMS 

entered upon, the employee acquires, to some ex- 
tent at least, a vested right in its continuance. 
However, while recognizing a right to the pension 
itself, systems of this type do not recognize a 
right to a withdrawal equity by workers separated 
from the service before reaching the retirement 
age. Even the right to the pension often is lim- 
ited. 1 

In contributory systems the cost is divided be- 
tween the employer and the employee, either 
equally, or on some other basis. A more im- 
portant matter is that ordinarily the employee 
acquires a definite right to the pension, 2 and he 
also ordinarily has a right to the return of his 
own contributions (either with, or without, in- 
terest) in case of his death or separation from 
the service prior to the retirement age. Such 
systems usually provide a death benefit. 

A contributory system really includes two ele- 
ments: one, the contribution of the employee, 
which represents savings against old age; the 
other, the contribution of the employer, which 
is in the nature of a pension proper. 

1 Thus, payment is sometimes limited by the adequacy of 
an amount set aside as a pension fund, and usually the bene- 
ficiary does not have a legal claim as against the employer. 

3 Some contributory systems contain "discretionary" pro- 
visions. The right to abandon the plan on return of the 
employees' contribution usually is reserved. 



PURPOSES OF PENSION SYSTEMS 49 

Contributory pension systems, while common 
in the public service, and fairly frequent among 
banking institutions, are very seldom used by in- 
dustrial establishments. 



CHAPTER II 

NON-CONTRIBUTORY PENSION SYSTEMS OF THE 

"discretionary" TYPE 

The great majority of private industrial pen- 
sion systems now in operation are of the non- 
contributory "discretionary" type: that is, no 
part of the cost is borne by direct contribution 
from the employee, while the employer has com- 
plete discretion, both with respect to the general 
features of the plan, and as to the granting, or 
even the continuance, of the pension in specific 
instances. Such systems flatly deny the existence 
of a contractual right. 

This type of pension system is based, whether 
consciously or unconsciously, on the assumption 
that a pension is a gratuity and, as such, may 
properly be awarded by the employer at his will. 
Most discretionary plans, in fact, state that the 
payments are gratuitous gifts. Clauses like the 
following are common: 

"The allowances are voluntary gifts from the 
company and constitute no contract and confer 
no legal rights upon any employee. The con- 
tinuance of the retirement allowance depends 
upon the earnings of the company and the allow- 

50 



"DISCRETIONARY" TYPE 51 

ances may at any time be reduced, suspended, or 
discontinued on that, or any other account, at 
the option of the Board of Directors." * 

"This plan was adopted by the Company, to 
reward long and faithful service. It is a purely 
voluntary provision made by the Company for 
the benefit of its employees, and constitutes no 
contract, and confers no right of action." 2 

"Neither the creation of this Fund nor any pro- 
vision or action in reference or relating thereto 
or the distribution or application thereof or any 
thing done under or because of or in relation 
to such Fund, shall be construed as constituting 
or effecting a contract, expressed or implied, or 
giving any employee, beneficiary, or other per- 
son, any legal rights, or right of action at law or 
in equity, either before or after pension granted, 
nor giving any employee the right to be retained 
in the service, and all employees remain subject 
to discharge to the ,same extent as if this Fund 
had not been created, the creation of such Fund 
and all provisions made in reference or relating 
thereto, being purely voluntary on the part of the 
Company for the benefit of employees who shall 
have rendered it long and faithful service." 3 

It is imperative at the outset to determine 
whether this conception of non- contributory pen- 
sions as voluntary gifts is sound. 

1 From plan of the Newport News Shipbuilding Corpora- 
tion. 

a From Pension and Relief Plan of the Standard Oil Com- 
pany of Kentucky. 

3 From Pension Board Regulations of the Pension and 
Relief Fund of Otis Elevator Company. 



52 INDUSTRIAL PENSION SYSTEMS 

Are Non-Contributory Pensions Gratuities? 

Originally, pensions were mere gratuities. 
Thus, to quote from one writer: 

"The history of the pension as a reward for 
public service goes back to the Roman Empire. 
At that period and for many centuries thereafter 
the pension existed as the gift of a sovereign to 
a subject for distinguished military service. As 
time went on the sovereign used his prerogative 
to reward distinguished achievement in other 
fields of endeavor, in literature, in art, in philan- 
thropy, but the pension always remained the free 
gift of a sovereign or of a government to an in- 
dividual." * 

"The word pension in the exact sense applies 
to a payment made to an individual, without his 
cooperation." 2 

In a strict sense a pension per se is primarily 
a gratuity. Distinction should, however, be made 
between pensions as voluntary or arbitrary pay- 
ments by an employer as a charity, and pensions 
paid under definite systems, where the prospect 
of a benefit is formally held before the worker 
as an inducement to, or reward for, continued 
service. As stated in the article just quoted: 

Carnegie Foundation for the Advancement of Teaching, 
Bulletin No. 9. "A Comprehensive Plan of Insurance and 
Annuities for College Teachers," p. 6. 

2 Ibid., p. 5. 



"DISCRETIONARY" TYPE 53 

"The personal pension is an ancient institu- 
tion. The pension system is distinctly modern." 

Pensions provided under formal systems, in- 
stead of being mere gratuities on the part of the 
employer, actually may come to a large extent 
out of the worker's own wage. Many, if not 
most, students of the pension problem hold that 
non-contributory pensions are essentially "de- 
ferred pay" and that, as such, they have a ten- 
dency to reduce the current rate of wages. In 
fact, some writers hold that there is no such thing 
as a "free" pension, but that in the long run the 
cost of non-contributory pension systems is borne 
by the worker himself. 

This issue is a vital one. If a pension is a mere 
gift dispensed by the employer as a charity, then 
the latter may be considered free to do as he 
pleases, just as in the case of any other charity. 
If, however, a pension is essentially a part of, or 
inevitably involved in, the wage payment, and 
merely deferred until a distant date, the situa- 
tion obviously is quite different and the worker 
as obviously has rights which cannot justly be 
ignored. 

Non-Contributory Systems as Deferred Pay 

The contention that non-contributory systems 
are essentially deferred pay and, furthermore, 



54 INDUSTRIAL PENSION SYSTEMS 

that they tend to reduce the rate of wages, is well 
brought out in the following statements selected 
from leading discussions of the pension problem. 
Illinois Pension Laws Commission: 1 

"Whether the contribution to a pension fund 
be taken wholly from the employee's wages or 
salary, or be paid wholly by the employer, or be 
derived in part from each, these contributions 
are in all three cases to be regarded as in reality 
a deduction from wages or salary. It is the opin- 
ion of students of the pension problem that the 
existence of a pension system in connection with 
any position of employment is taken into account 
by both parties to the contract of employment, 
and that, broadly speaking, wages and salaries 
actually paid are in due course reduced below 
what they otherwise would be by the amount 
of the total contributions from both the employer 
and employee to a pension fund. The employee 
will thus pay for his pension by deductions from 
his wages or salary, whether he is conscious of 
it or not." 

The commission, indeed, went so far as to 
say that: "It is quite possible that, with a sound 
fund in existence, the reduction in wages and 
salaries may in time materially exceed the amount 
of the total contributions, owing to the advan- 
tages of such a fund to the employee under pres- 
ent economic conditions. This consideration 

1 Report of Illinois Pension Laws Commission, 1916, p. 282. 



"DISCRETIONARY" TYPE 55 

further emphasizes the advantage to the em- 
ployer of having such a fund established." 

The Massachusetts Commission on Pensions 
accepted the deferred pay principle, holding that 
"non-contributory pensions inevitably come to be 
considered as deferred pay, and tend to result in 
holding down rates of remuneration." * A similar 
position was taken by the Pennsylvania Commis- 
sion on Old Age Pensions, 2 by the Wisconsin 
Pension Laws Commission, by the United States 
Commission on Economy and Efficiency, 3 and by 
various other official commissions appointed to 
study the pension problem. 

The theory of pensions as deferred pay has 
been very generally accepted by writers on the 
subject. Thus, one critic has said: 

"The real incidence of the cost of a retirement 
system in the case of employees who enter the 
service after the establishment of the system is 
placed by economic forces on the employee. The 
benefits offered by the system become part of his 
compensation for the services rendered." 4 

1 Massachusetts Commission on Pensions, 1914 Report, p. 
12. (See footnote, p. 30.) 

2 Report of the Pennsylvania Commission on Old Age Pen- 
sions, March, 1919, pp. 114-115. 

3 Report of the Commission on Economy and Efficiency 
Relative to Retirement from the Classified Civil Service of 
Superannuated Employees, pp. 17-19. 

4 Lewis Meriam. "Principles Governing the Retirement of 
Public Employees," p. 388. 



56 INDUSTRIAL PENSION SYSTEMS 
W. E. H. Lecky: 

"All experience shows that where a pension is 
attached to a particular employment, the rate of 
wages in it is greatly below what would other- 
wise have been the market rate." * 

Henry S. Pritchett, of the Carnegie Founda- 
tion for the Advancement of Teaching: 

"Salaries are undoubtedly lowered in the course 
of time by a free pension system, but not to such 
an extent as to prevent the pension roll from be- 
coming an enormous burden." 2 

"The notion that in the free pension the bene- 
ficiary gets something for nothing is an illusion. 
There is no free pension where the questions of 
wages and pension are involved together. In 
the course of a limited number of years such 
pensions will be adjusted to the salary or wage 
scale. Under such conditions all salaries will be 
affected, while only a minority will get pen- 
sions." 3 

The deferred pay principle does not necessarily 
involve a depression of current money wages in 
order to make that principle operative. If the 
pension is a substantial inducement for the 
worker to remain in the service rather than to go 
elsewhere, then the worker has an equity in the 

la 01d Age Pensions, A Collection of Short Papers": p. 111. 
2 Carnegie Foundation for the Advancement of Teaching, 
Bulletin No. 9, p. 8. 

'Carnegie Foundation, 13th Annual Report, p. 21. 



"DISCRETIONARY" TYPE 57 

benefit, even though his current money wages 
have not been depressed. In this case it becomes 
a part of the consideration for which service is 
rendered. As one writer has said: 

"A pension is as much a part of an employee's 
real wages as are conditions of labor, guarantee of 
steady employment, board and lodging (where 
these are included), medical attention, half pay 
in case of sickness, and other features not included 
in the actual money wages received. 

"In order to get a full understanding of old- 
age and service pensions, they should be consid- 
ered as a part of the real wages of a workman. 
There is a tendency to speak of these wages as 
being paid by the company, or, in cases where 
the employee contributes a portion, as being paid 
partly by the employer and partly by the em- 
ployee. In a certain sense, of course, this may 
be correct, but it leads to confusion. A pension 
system considered as part of the real wages of an 
employee is really paid by the employee, not per- 
haps in money, but in the foregoing of an increase 
in wages which he might obtain except for the 
establishment of a pension system." l 

That a pension is essentially in the nature of 
deferred pay was repeatedly asserted by the Sub- 
Committee of the Executive Committee of King 
Edward's Hospital Fund for London, which made 
an unusually exhaustive study of the pension 

x Albert de Roode. 'Tensions as Wages." American Eco- 
nomic Review, March, 1913. 



58 INDUSTRIAL PENSION SYSTEMS 

problem extending over a period of several years. 
The opinion of the committee is perhaps the 
more significant because of the popular feeling 
that money subscribed to a hospital for the sake 
of the poor should not be used for the granting 
of pensions. The committee rejected this idea 
and emphatically endorsed the contention that 
pensions are in the nature of deferred pay. 1 

Furthermore, testimony by Sir Francis Mowatt 
before the Courtney Commission of Great Britain 
showed conclusively that salaries were lower in 
certain branches of the Civil Service where pen- 
sions were paid, than in others where no pen- 
sions were paid. Extracts from his testimony 
follow. 2 

"Now in fixing the scale of pay of your dif- 
ferent servants, you necessarily have some regard 
to the advantage secured by that annuity? 

"Yes. . . . I do not think I can go nearer than 
this — that of late years when we have moved 
men from the non-pensionable part of the Ser- 
vice to the pensionable part of the Service we 
have usually reduced their pay by something un- 
der ten per cent. But I must explain to the Com- 
mission that that does not mean a permanent 
reduction of ten per cent throughout their service, 

1 Report of Sub-Committee of the Executive Committee of 
King Edward's Hospital Fund: "Pensions for Hospital Officers 
and Staffs," p. 5. 

2 "Pensions for Hospital Officers and Staffs," pp. 48-49. 



"DISCRETIONARY" TYPE 59 

but only this — that so long as they are in the 
particular class to which they are transferred 
that deduction is continued. . . . 

"My own definition of deferred pay, which 
perhaps you will allow me to give again with ref- 
erence to this, is really this, that there is no doubt 
that a part of a Civil Servant's remuneration is 
deferred pay in this sense, that it is remuneration 
which is deferred from his immediate salary, and 
applied towards granting him a pension. In 
that sense, and within the conditions of the Ser- 
vice which he joins, that is a deferment from his 
actual remuneration; if there were no pension 
he would no doubt get some more pay." 

As further evidence of the effect of a pension 
system upon wages, it may be noted that a rail- 
way employee, testifying before the British Board 
of Trade Committee on Superannuation Funds, 
stated that "men are deterred from leaving the 
service on account of their prospective pensions," 
that is, "if there had been no pensions to look 
forward to, of course the salaries would need to 
be higher." This witness also stated that many 
of his acquaintances "refused to leave the service 
although they have been offered a larger salary, 
because of the prospective pensions." * 

Testimony to the same general effect was given 
by a government employee before the British 

British Parliamentary Papers, 1911, Vol. XXIX, Part 1, 
p. 93. Quoted by Meriam, p. 20. 



60 INDUSTRIAL PENSION SYSTEMS 

Royal Commission on Superannuation and Civil 
Service. This witness contended that "there is a 
great deal of Phariseeism" in the argument that 
a pension system was based upon the fact that 
government authorities did "not like to see their 
servants practically in the gutter in old age." He 
further stated: "So far as a company may be 
said to contribute to such a fund, I most unhesi- 
tatingly assert that it is simply a portion of the 
man's wages paid year by year for a specific pur- 
pose: it is simply paid in another way." 1 

In further support of the contention that the 
non-contributory pension is essentially deferred 
pay, the action of the civil servants under the 
British Crown toward a pension system which 
had been maintained for a long period of years 
is often cited : While the British Civil Service plan 
did not require contributions, 70,000 out of 
100,000 employees contended that the pensions 
were deferred pay, and expressed a preference for 
a contributory system. Their contention as to 
the deferred pay issue was sustained by the com- 
mission appointed to study the matter. 2 

The contention of these various students of the 
problem that "free" pensions are essentially de- 

1 British Parliamentary Papers, 1903, Vol. XXXIII, p. 84. 
Quoted by Meriam, p. 20. 

2 The Carnegie Foundation for the Advancement of Teach- 
ing. Bulletin No. 9, 1916, p. 35. 



"DISCRETIONARY" TYPE 61 

ferred pay was endorsed by numerous pension 
authorities and economists interviewed in the 
course of the current investigation. 

As opposed to these opinions in support of 
the deferred-pay principle, it is often held by 
industrial employers that pension systems have 
no effect on the current rate of wages. Some em- 
ployers point to the fact that they do not hold out 
the prospect of a pension to the worker when he 
seeks employment, but, indeed, that they forbid 
their employment executives to refer to the ex- 
istence of a pension plan. This really has little 
significance. In a great many cases the prospec- 
tive employee will know whether or not the 
company maintains a pension system. Moreover, 
in private industry it is a matter of relatively 
small consequence whether the employee con- 
siders the pension in making his original wage 
bargain. He will know of the plan almost imme- 
diately after he enters the service, and its appeal 
will have more weight with him in the event of 
contemplated separation from the service than 
when he originally seeks employment. As a mat- 
ter of fact, there is an inconsistency in regarding 
new workers as within the scope of a pension plan. 
Until an employee has passed through the initial 
period of heavy labor turnover he should not be 
looked upon as a prospective pensioner. 



62 INDUSTRIAL PENSION SYSTEMS 

Other employers having pension plans point to 
the fact that they pay the prevailing rate of 
wages. Thus, the executive of one large com- 
pany having a non-contributory plan stated: 

"As far as the practice of this Company is con- 
cerned, a pension has nothing of the nature of 
deferred pay. We pay wages equal at least to the 
prevailing rate, and in some cases more. A pen- 
sion cannot in my judgment partake of the nature 
of deferred pay unless similar pension systems are 
universally adopted in industry." 

A writer on labor questions, in this connection, 
has said: 

"Regardless of pension plans it is obvious that 
the wage rate will have to approximate the rate 
prevailing in the community." 1 

If pension systems were in practically universal 
operation the argument that they are not in the 
nature of "deferred pay" would have considerable 
weight. L'nder the working of competition, how- 
ever, the establishment paying pensions must 
meet the prices named by those who are not under 
this expense. Under such conditions it will be 
difficult, if not impossible, to pass the cost of a 
pension system on to the consumer. The cost 
must, therefore, come out of wages or out of 
profits. The employer naturally will try to avoid 

'John A. Fitch. The Survey. 



"DISCRETIONARY" TYPE 63 

a sacrifice of his profits, and in view of the dis- 
cussion and evidence just presented, it seems rea- 
sonably certain that he will, consciously or un- 
consciously, endeavor to recoup the cost out of 
the wage. 

In this connection the following statement by 
Dr. A. T. Hadley, of Yale University, may be 
noted: 

"The payments to the insurance funds must 
chiefly, if not wholly, come out of wages. Even 
though they be nominally levied on the employer, 
he is compelled by competition with other em- 
ployers not subject to this levy, to reduce in cor- 
responding degree the wages he pays." x 

A theory of pensions has been advanced to the 
effect that the employer's contribution to a pen- 
sion scheme is, at least in part, similar to a charge 
for depreciation or insurance, and that "in so far 
as such a payment by the employer is for insur- 
ance against that waste and inefficiency in his 
establishment which would result from retaining 
superannuated employees and for protection 
against that discontent which would result from 
discharging the superannuated without providing 
for them financially, it is a part of the business 
expense." 2 

*A. T. Hadley. "Economics," pp. 60-61. 

2 Louis D. Brandeis. "Business a Profession," pp. 67-69. 



64 INDUSTRIAL PENSION SYSTEMS 

If this theory of pensions be accepted, it might 
be argued that the employer's contribution, at 
least in part, is charged into the selling cost of the 
goods and is, therefore, secured from the consumer 
rather than out of the wages of the worker. 1 

Conclusions as to Deferred-Pay Issue 

Notwithstanding the formidable array of 
opinion that a pension is essentially deferred pay, 
in the sense that it depresses the current rate of 
wages, this principle appears to be subject to im- 
portant limitations in its practical application. 
In order that the deferred-pay principle shall 
actually be operative, it is imperative that pay- 
ment of the pension shall be reasonably assured. 
Several of the statements above quoted, to the 
effect that a pension tends to depress the rate of 
wages, have reference to governmental pension 
systems. In the government service, as already 
emphasized, there is ordinarily no question as to 
the financial responsibility of the employer, or its 
continuance as an employer. Moreover, many 

1 It is possible that some of the difference of opinion on this 
point is due to the fact that many pension systems have been 
put into effect by great corporations, frequently by those com- 
monly designated as trusts, and that such employers may find 
it easier to pass the cost of a pension system along to the 
consumer in the form of increased prices of products than 
would a smaller establishment. It is doubtful, however, 
whether the cost of a pension system is, as a matter of fact, 
entirely charged into the price of the product. 



"DISCRETIONARY" TYPE 65 

employees enter the government service with the 
intention of making it a lifework and, generally 
speaking, feel a relatively high degree of security 
in their positions. 

Where such conditions obtain it seems inevi- 
table that the tendency of a non-contributory 
pension system will be to depress the rate of 
wages. In the case of employees in the British 
Civil Service, moreover, the evidence that this 
was the actual effect is convincing. The testi- 
mony (see p. 39) is specific that the current com- 
pensation of employees in certain pensionable 
classes was appreciably lower than that of other 
workers of the same grade in non-pensionable 
positions. 

Where, however, the pension promise is sur- 
rounded by many conditions, or where the re- 
sponsibility of the employer or his continuance 
in business is uncertain, or where the turnover 
of labor is exceptionally high, it seems doubtful 
whether a pension system has a significant effect 
on the rate of wages; this is especially true in 
the case of workers under middle age. In other 
words, if the expectation of receiving a pension 
is extremely vague, then it would seem almost 
axiomatic that the effect on current wages will be 
correspondingly modified. 

If this view be accepted, it follows that the 



66 INDUSTRIAL PENSION SYSTEMS 

actual effect of a pension system in depressing 
the current rate of pay would ordinarily be much 
less marked in the case of employees in a private 
industrial establishment than in the case of pub- 
lic service employees such, for instance, as mem- 
bers of the police or fire department forces, 
teachers, or even clerical workers. 

The amount of the pension benefit has an im- 
portant bearing on this question. Even if the 
worker counts with considerable confidence on the 
receipt of a pension, it will not be a material 
influence with respect to current compensation 
unless it is of substantial amount. On the other 
hand, the promise of a large pension may exert a 
very appreciable influence. 

As the worker's period of service lengthens and 
as he approaches the retirement age, it seems 
obvious that the prospect of a pension will have 
an increasing appeal and will exert a more certain 
effect upon the current rate of pay. At the same 
time, also, it seems inevitable that the employer 
will take this attitude of the workers into con- 
sideration in determining wages. He may not 
reduce wages because of the prospective pension 
benefit, but he may very naturally hesitate to 
increase the wages of his older workers in view 
of the prospect that in the near future he will be 



"DISCRETIONARY" TYPE 67 

paying them a pension, although they will no 
longer be rendering him service. 

The conclusion seems warranted, therefore, that 
the theory of deferred pay holds whenever and 
wherever the pension benefit is counted upon with 
reasonable certainty by the worker. The actual 
effect upon the current rate of wages will depend 
on the amount of the benefit and on the condi- 
tions surrounding its payment. 

As a corollary it follows that in such cases a 
worker actually has a right to a pension, at least 
to the extent that the principle of deferred pay 
has actually been operative. 1 If he suffers a reduc- 
tion in wages, or foregoes an increase in wages ; 
because of his confidence that the promised pen- 
sion actually will be received, he cannot justly 
be denied that benefit if he has rendered the 
service. 

The non-contributory system of the "discre- 
tionary" type flatly denies any such contractual 
right on the part of the worker. It seems incon- 
trovertible that this denial of a contractual right 
is a serious if, indeed, not a fatal defect of such 
systems. 

The comparative uniformity with which spe- 

*It may be noted that the deferred-pay principle does not 
apply to back service rendered before the introduction of a 
pension system. For a discussion of this point, see p. 176. 



68 INDUSTRIAL PENSION SYSTEMS 

cine waivers of contractual liability are included 
in pension plans of the discretionary type suggests 
that their authors are fearful that such a liability 
might otherwise be claimed. 

It has been held by a New York court that an 
employee dismissed from service has no right to 
any accrued share of a pension under a system 
where employees have not contributed to the 
fund. 1 The Court said : 

"Under the regulations established, it seems to 
me that none of the employees has a vested in- 
terest in any part of this fund, even though 
credited upon his pass book, until the gift is com- 
pleted by actual payment." 2 

So far as known this question has not arisen 
with respect to the continuance of a pension once 
entered upon. 

Argument That a Pension Is Pay "Conditionally" 
Deferred 

Accepting the principle of deferred pay as 
sound within a more or less limited field, there 

1 McNevin v. Solvay Process Co., 32 App. Div. 610; affirmed 
166 N. Y. 530. 

a It may be noted that one writer, in commenting upon this 
case, has said: 

"It might be well to suggest, however, that lack of consid- 
eration has always given the equity side of the courts oppor- 
tunity to step in. It is not improbable that if the matter 
were ever brought into the courts elsewhere, this particular 



"DISCRETIONARY" TYPE 69 

remains the collateral question whether the pen- 
sion is pay unconditionally deferred, so that the 
worker has at all times an "accrued vested right," 
or whether it is deferred subject to conditions 
which vitally affect the worker's equities therein. 
That the right of the worker to a pension as 
deferred pay is a conditional right was asserted 
by the so-called Courtney Commission of Great 
Britain, appointed in 1902, which held in sub- 
stance that 

"a deferred pension is remuneration for services 
as much as an immediate money payment; but 
it is, in part at least, remuneration for continuity 
of service contingently payable on the continuity 
being maintained during a defined period and not 
accruing from year to year as an indefeasible in- 
terest." x 

This distinction is one of great practical impor- 
tance. It obviously has a vital bearing on the 
right of the worker to a withdrawal equity in the 
event of his separation from the service. 

This contention that the worker's right to a 
pension as deferred pay accrues only upon the 
completion of a stipulated period of service is, 

part of the plan might be set aside on this ground, as well as 
on the ground of being against public policy." (Albert de 
Roode. "Pensions as Wages." American Economic Review, 
March, 1913.) 
1 "Pensions for Hospital Officers and Staffs," p. 47. 



ll 



70 INDUSTRIAL PENSION SYSTEMS 

however, by no means universally accepted. 
Thus the Sub-Committee of the Executive Com- 
mittee of King Edward's Hospital Fund for Lon- 
don, in discussing this point, declared itself "in 
favor of the principle that every year of hospital 
service, whenever and wherever given, should be 
regarded as pensionable with rights vesting ac- 
cordingly." 

While this statement was made with special 
reference to the hospital services then under con- 
sideration, it seems worthy of notice in connection 
with discussions of private pension systems. 

In the article already cited, 1 de Roode likewise 
held that the right of the worker to a pension 
accrues from year to year, subject, however, to 
the condition that the right might begin to accrue 
only after some stipulated, but relatively brief, 
period of service. In this connection, he said : 

"Considering pensions as a part of wages, the 
contributions made each year to the pension fund 
by the Government should be considered, subject 
to one exception, as deferred wages, payable to 
the employee upon separation from the service, 
or to his heirs in case of death. The exception to 
this general principle should be in the case of the 
early years of service. A pension is not a mere 
increase in wages; it is an inducement to con- 
tinued service. Many persons enter government 

1 "Pensions as Wages." American Economic Review, March, 
1913. 



"DISCRETIONARY" TYPE 71 

service as a temporary occupation. The right of 
the employee, therefore, to the accrued value of 
his pension should not commence until he has 
passed what might be called the temporary stage. 
Roughly speaking, this would be five or six years, 
and the accrued value of the pension returned to 
him upon separation would commence with the 
beginning of what might be called the more per- 
manent service." * 

If the theory be accepted that a non-contribu- 
tory pension is pay "conditionally" deferred over 
practically the entire working life of the em- 
ployee, it obviously is but a short step from the 
use of a pension as a promise, or inducement, to 
its use as a club or threat to compel workers to 
remain in the service. Some of the objections to 
a policy of compulsion have already been noted. 
At least if pressure is to be brought upon workers 
to continue in the service, it would seem that some 
far less cumbersome method could be devised than 
the inauguration of a pension system, with its 
heavy and uncertain financial burden. 

One effect of such an interpretation, as already 
pointed out, is to produce great inequity as be- 
tween workers. The worker who is fortunate 

*It will be noted that this statement had special reference 
to employees in the public service. However, deRoode held 
that "pensions for public employees should be considered 
from the same fundamental basis as pensions for private em- 
ployees, and they should no less be considered as part of 



72 INDUSTRIAL PENSION SYSTEMS 

enough to continue in the service until the retire- 
ment age may receive a very large benefit; the 
much larger number who fall short of the retire- 
ment age may, and usually do, get nothing. 

Objection to such interpretation of pensions has 
been taken by one writer x on the ground that, 
just as a life contract between a private employer 
and an employee would not be sustained in the 
courts, as being against public policy, likewise 
a contract would be objectionable, any part of the 
consideration for which was conditional upon life 
service to the retirement age. While the objec- 
tion in question had reference to pensions in the 
public service, again it seems applicable to private 
pension systems. 

Conception of Pension Systems as a Form of 
Tontine Insurance Indefensible 

One further suggestion relative to the deferred- 
pay theory remains to be considered, namely, that 
while a pension may be regarded as deferred pay, 
it is deferred pay to be invested in a tontine in- 
surance scheme under which, admittedly, many 
will contribute but only a few benefit. It has 
been argued by some that so long as the facts are 
fairly placed before the worker there is no ground 

1 Lewis Meriam. "Principles Governing the Retirement of 
Public Employees," pp. 420-421. 



"DISCRETIONARY" TYPE 73 

for criticism if he chooses to take his chances in 
such a scheme. 

One answer to this is that tontine insurance 
is very generally condemned and, in some states 
of this country, is flatly forbidden by law. 
A point of more importance is that employees 
as a rule do not "choose" to enter upon pension 
plans. Non-contributory plans clearly are at the 
employer's option. In most contributory plans, 
moreover, participation is compulsory, at least for 
new employees. Practically, therefore, there is 
no "choice' ' in either case. 

The conception of pension systems as a form of 
mutual insurance on the tontine plan has been 
very generally condemned by most students of 
pension problems. Thus, the Massachusetts Pen- 
sion Commission, in its 1914 report, said on this 
point: 

"That a pension is a deferred wage implies 
that the employee has earned a certain wagejart 
of which is retained by the employer to be paid 
him on retirement at a stated age. But what be- 
comes, under such a theory, of the deferred wages 
earned by the employee who leaves the service or 
dies? He forfeits that part of his wages which has 
not been paid because deferred, and the forfeited 
wages become part of a fund from which are paid 
the pensions of those who survive to the pension- 
able age. This is in fact a tontine system, which 
is to-day condemned by the best insurance laws. 



74 INDUSTRIAL PENSION SYSTEMS 

"Looking the question squarely in the face, 
would the employees assent to a pension upon 
the theory of deferred wages, and consent that 
part of their wages be held back for the benefit of 
those who survive to the pensionable age? Upon 
such a theory the employee, in order to recover 
his wages, would have to succeed in three things : 
living to a certain age, remaining in the service 
until that age, and living beyond that age long 
enough to get back the value of his contributions." 

It should be noted that while this might seem 
to be an argument against the validity of the 
deferred-pay theory, in reality it does not dis- 
credit that theory, but rather discredits pension 
systems which do not recognize that theory by 
definitely assuring some compensating benefit in 
return for the pay thus deferred. 

The New Jersey Bureau of State Research, in 
discussing this phase of the problem, said : 

"The 'tontine' or forfeiture feature was very 
early introduced, in a somewhat modified form, in 
the pension funds in France and Great Britain, 
and from there was copied into the pension funds 
in the United States. A movement to rid our 
pension funds of this feature is already on foot. 
The first steps along this line were taken by 
Massachusetts, New York City, Pennsylvania, 
and Connecticut, which have in their new systems 
supplanted the tontine features by sound insur- 
ance and savings features." * 

1 "Teachers' Retirement Systems in New Jersey, Their 
Fallacies and Evolution." Report prepared by Paul Studen- 
sky, 1918, p. 64. 



"DISCRETIONARY" TYPE 75 

While this statement had reference to a con- 
tributory system, the objection to the tontine 
principle is applicable to a non-contributory sys- 
tem in so far as the deferred-pay theory is op- 
erative. 

Effect of Non-Contributory Pension Systems on 
Thrift 

An objection frequently urged against non- 
contributory pension systems is that they neces- 
sarily tend to discourage habits of thrift. If some 
one, whether the State or the individual employer, 
assures a group of individuals that their old age 
will be provided for, and if that assurance is relied 
upon, the beneficiaries will, it is argued, have less 
incentive to provide for themselves. On this 
point the Massachusetts Commission on Old Age 
Pensions, Annuities, and Insurance said: 1 

"A non-contributory pension system would 
weaken the motive to individual saving, and 
would react unfavorably on character, by lessen- 
ing the sense of personal responsibility and inde- 
pendence. . . . 

"The process of social betterment clearly mani- 
fest in the advance of wages, the increase of sav- 
ing, and the decline of pauperism, will continue, 
unless the forces that have been bringing it about 
are undermined by unwise social legislation. . . . 

Report, 1910, pp. 301, 308, 309. 



76 INDUSTRIAL PENSION SYSTEMS 

By establishing a pension system for the benefit 
of the few who may perhaps need such aid, the 
State would strike a blow at the resources of 
thrift, individual responsibility, and family in- 
tegrity, which have enabled the great majority 
of the population to maintain themselves in self- 
supporting independence. In the impatient effort 
to help things forward at a faster pace, we should, 
by attempting an experiment with non-contribu- 
tory pensions, immediately retard and ultimately 
reverse the process of social betterment.'' 

A similar opinion, with respect to general old 
age pensions, was expressed by W. E. H. Lecky, 
as follows: 

"It proposes to teach the whole working popu- 
lation to look to the State, and not to themselves, 
for the provision for their old age and for the 
old age of those who might be dependent on them, 
and thus to destroy the most powerful of all mo- 
tives to thrift, the very mainspring of productive 
and self-sacrificing industry. . . . 

"Can it be seriously believed that the addition 
of many millions a year to the state funds directly 
employed in the relief of poverty will, in the long 
run, tend to diminish pauperism or to encourage 
self-reliance and thrift?" * 

Still another opinion to the same effect may be 
cited : 

1 W. E. H. Lecky, article in Forum, Feb., 1900, pp. 694, 695. 
Quoted from Report of Massachusetts Commission on Old 
Age Pensions, Annuities and Insurance, 1910, p. 309. 



"DISCRETIONARY" TYPE 77 

"The establishment of such a system would 
constitute a definite abandonment of the hope 
that any large proportion of the poor will ever be 
able to provide for their old age, by the improve- 
ment of wages and increases in their sense of re- 
sponsibility." x 

While several of these criticisms are directed 
at government old age pensions, nevertheless they 
seem applicable, at least to a considerable extent, 
to private pension plans of the non-contributory 
type. Here again, however, the actual effect of 
a non-contributory system will largely depend 
upon the certainty of the pension promise from 
the standpoint of the worker. Where the State 
pays a free pension the recipient will count with 
almost complete assurance upon it and, in such 
cases, it seems almost axiomatic that he will have 
correspondingly less incentive to provide for him- 
self. In many private schemes, as already shown, 
the worker has no such positive assurance as 
under a state pension. If he counts with only a 
vague hope on ever receiving a benefit, it may 
fairly be questioned how far the existence of a 
pension system will lead him to abandon habits 
of thrift. 

The view is, however, held by some pension 
critics that one of the greatest handicaps to thrift 

'"Old Age Pensions: A Collection of Short Papers," p. 12. 
Quoted from Report of Massachusetts Commission on Old 
Age Pensions, Annuities and Insurance, 1910, p. 309. 



78 INDUSTRIAL PENSION SYSTEMS 

is the difficulty of getting a start, and that this 
requires so much sacrifice that the worker, espe- 
cially if he encounters sickness, accident, or other 
misfortune, is easily discouraged. These critics 
hold that the prospect of even a very moderate 
pension may prove an incentive to saving, rather 
than otherwise. 1 

In considering this argument the fact of every- 
day experience should not be overlooked, that 
thrift is often found among those who appear to 
have the greatest burdens to carry, while extrava- 
gance as frequently occurs among those with the 
fewest responsibilities and apparently the best 
opportunities for saving. 

The argument that lack of thrift is partly due 
to difficulties in getting a start may have some 
force, but on the whole the conclusion seems justi- 
fied that a non-contributory pension system, 
either in public or private employment, has a 
tendency to discourage, rather than to stimulate, 
individual thrift. 

Conclusions as to Non-Contributory Systems of 
the "Discretionary" Type 

The preceding discussion shows that there is a 
conflict of opinion as to whether, and particularly 

a This point of view is clearly reflected in a discussion of 
the British Pension Act of 1908 by Henry R. Seager. (Article 
in Charities and Commons, October 3, 1908.) 



"DISCRETIONARY" TYPE 79 

as to how far, a non-contributory pension system 
savors of the nature of deferred pay, and still 
further disagreement and confusion as to how far 
that system directly affects the current rate of 
wages. It appears, however, that the following 
facts are fairly well established: 

1. That, where its receipt is considered by the 
worker as definitely assured, a non-contributory 
pension is essentially deferred pay and, further- 
more, actually depresses the current rate of wages. 

2. That, where the receipt of the pension is 
involved in great uncertainty, or where the 
amount is very small, its effect on the current rate 
of wages will be much less marked, and possibly 
negligible. 

3. That the theory that a pension is pay "con- 
ditionally" deferred over a long period of years 
is sharply disputed by some of the best authori- 
ties. 

4. That the use of a non-contributory pension 
as a sort of tontine insurance is very generally 
condemned. 

5. That a non-contributory pension system 
tends to discourage individual thrift. 

6. That, to justify itself, a pension system 
should carry assurance that pensions will be re- 
ceived, in which case the theory of deferred pay 
becomes operative. 

7. That, in such cases, considerations of jus- 
tice demand that the amount of pay deferred be 



80 INDUSTRIAL PENSION SYSTEMS 

regarded as rightfully belonging to the worker and 
be returned to him under equitable terms, or to 
his heirs if he dies before receiving it. This would 
not prevent requirement of a brief period of serv- 
ice before the worker's right should be regarded as 
vested. 

8. That, as a corollary, the "discretionary" 
type of private pension systems now generally in 
effect is objectionable, or at least falls far short 
of a reasonably ideal system. 

In effect, a non-contributory system of the "dis- 
cretionary" type says to the worker: 

// you remain with this company throughout 

your productive lifetime, 
// you do not die before the retirement age, 1 
// you are not discharged, or laid off for an ex- 
tended period, 
// you are not refused a benefit as a matter of 

discipline, 
// the company continues in business, and 
// the company does not decide to abandon this 
plan, 

you will receive a pension at the age of , sub- 
ject to the contingency of its discontinuance or 
reduction, after it has been entered upon. 

The question immediately arises: What is the 
justification of a formal pension system sur- 

1 Some systems of this type provide a death benefit. 






"DISCRETIONARY" TYPE 81 

rounded by so many conditions, waivers, and 
reservations? 

It should be emphasized that the objection to 
the "discretionary" feature is not the employer's 
right to abandon or modify the scheme, but the 
right to make such changes retroactive by deny- 
ing any contractual right on the worker's part 
in the pension benefit. Because of the hazards 
under which business is conducted and the uncer- 
tainties involved in the financial phases of pen- 
sion systems themselves, it is imperative that the 
right to abandon a pension plan be reserved by 
the employer, although that right should be ex- 
ercised only after most serious consideration. But 
to escape all obligations to those who have for 
years rendered service with the prospect of a pen- 
sion in view, is a very different matter. 

In this connection the following comment by 
the Special Committee on Industrial Pensions of 
the New York Merchants' Association is worthy 
of special emphasis: 

"The corporation is quite right in providing 
that it reserves the right to alter the rules, or to 
free itself entirely from the pension obligation. 
It should be possible always to utilize experience, 
even to the extent of abandoning the entire un- 
dertaking. But such reservations should always 
be prospective only, they should never take effect 
retroactively. To provide, as is often done, that 



82 INDUSTRIAL PENSION SYSTEMS 

the corporation may wind up the pension plan 
at any time without fulfilling the promises 
already made, and then to expect employees to 
look forward with confidence and order their lives 
upon the strength of these promises, is certainly 
inconsistent. When the economic aspect of pen- 
sions is considered, such retroactive power of 
revocation can hardly be considered as moral. . . . 

"The employees are entitled to a pension sys- 
tem which has set up an actuarial balance over 
the years in which any one of them can expect to 
be affected. If the employee is required to con- 
tribute to the pension system, this is only honest. 
Even if the pensions are apparently the free gift 
of the corporation, and the economic possibility 
of this for a considerable period is doubtful, the 
employee is entitled to look forward with assur- 
ance to the pension promise. A pension prom- 
ise that is not certain involves an uncertain 
morality." 

If it could be demonstrated that the deferred- 
pay theory did not hold, the various objections 
to "discretionary" systems on the ground of in- 
equity might be answered by the argument that, 
in so far as any portion of the workers receive a 
benefit, such a system is better than none. But 
if in order to pay benefits to a trifling percentage 
of the force the current wages of a large propor- 
tion are reduced, this argument cannot be sus- 
tained. 

The conclusion seems forced, therefore, that 



"DISCRETIONARY" TYPE 83 

even though a pension system be financed wholly 
by the employer, the worker has rights under it 
which cannot be denied. This, in turn, leads to 
the conclusion that systems of the "discretionary" 
type cannot be justified or, at least, that they do 
not make a reasonable approach to a practically 
attainable ideal. 

The argument most frequently advanced in 
favor of non-contributory pension plans of the 
"discretionary" type is that of simplicity and ex- 
pediency. One of the chief advantages, in the 
opinion of many employers, is that complete 
control lies in the hands of the employer. Many 
industrial employers who have carefully con- 
sidered both types and some who are impressed 
by certain advantages of the contributory system 
have, nevertheless, concluded that the practical 
advantages of the non-contributory type of pen- 
sion plan are controlling. 

The following statement by one employer fairly 
expresses the attitude of many on this point: 

"We discussed very thoroughly the matter of 
a contributory or non- contributory pension and, 
due to the complexity of any contributory plan, 
we decided to adopt the non-contributory plan. 
. . . Certainly the non-contributory system is far 
simpler and easier of administration." 

In view of the deferred-pay principle already 



84 INDUSTRIAL PENSION SYSTEMS 

discussed, however, and of the great inequality 
which a "discretionary" system produces as be- 
tween workers who complete a stipulated period 
of service and the larger number who fall short 
of doing this, yet spend the greater part of their 
active lives in the employ of a given establish- 
ment, the conclusion seems unavoidable that the 
issue of expediency is not a sufficient justification 
of non-contributory systems of the "discretionary" 
type. 

In thus condemning the fundamental principles 
involved in "discretionary" pension systems, it 
should be recognized that such systems in actual 
practice often may be free from some of the 
abuses by which they are easily subverted. Much 
depends upon the spirit in which the plan is actu-» 
ally administered. In many cases the actual in- 
terpretation of the plan is far more liberal than 
its letter. Employees who just fail of reaching 
the retirement age sometimes are permitted to 
participate in the pension benefit, at least to some 
extent. In general, however, no benefit is paid 
under a "discretionary" plan to a worker volun- 
tarily quitting the service, or to one who is dis- 
charged. In any case the worker cannot insist 
upon consideration as a matter of right. It may 
be noted in passing, moreover, that any disposi- 
tion toward greater liberality than the rules pre- 



"DISCRETIONARY" TYPE 85 

scribe carries with it the danger of impairing the 
financial stability of the scheme. 

Furthermore, while in some cases the interpre- 
tation of the plan is more liberal than the plan 
itself, in other cases plans have been arbitrarily- 
changed in such way as greatly to limit the pen- 
sion benefits. 1 

In spite of the grave objections raised against 
them, "discretionary" pension systems are in 
many cases to be regarded as a sincere attempt to 
solve one of the most complex problems in mod- 
ern industrial economics. That they have not 
solved it completely or satisfactorily is no occa- 
sion for wholesale denunciation of their authors. 
Nevertheless, in view of the numerous objections 
to such systems, and particularly their failure to 
place the pension benefit on a definite contractual 
basis, their ready liability to abuse, their inade- 
quacy as a means of meeting the superannuation 
problem, their great danger of financial shipwreck, 
it is clearly incumbent upon an employer about 
to inaugurate a retirement system to endeavor in 
every practical way to devise some method which 
will more nearly approach an ideal plan. 

In this connection, the following comment is 
pertinent: 

1 In this connection see p. 167. 



86 INDUSTRIAL PENSION SYSTEMS 

"It may be concluded that the efforts which 
industrial corporations are making for the relief 
of old age dependency, in view of their paucity 
and variety, do not give satisfactory ground of 
hope that the ultimate solution of the problem 
can be reached in this way. At best their efforts 
are a makeshift; and their chief value is that of 
a guideboard along the roadway of the ultimate 
happy destiny of the army of American toilers." 1 

*Lee Welling Squier. "Old Age Dependency in the United 
States," p. 108. 



CHAPTER III 

NON-CONTRIBUTORY PENSION SYSTEMS OF THE 

"limited-contractual" TYPE 

Under non-contributory pension systems des- 
ignated in this discussion as of the "limited- 
contractual" type, the right to receive a benefit 
where the worker has fulfilled the conditions of 
the plan and has entered upon the pension roll 
is definitely recognized, and a pension once 
granted ordinarily cannot be discontinued — at 
least without provision for meeting any rights 
accrued by reason of the service rendered. 

Ordinarily, however, no right is recognized in 
plans of this type until the worker has actually 
gone upon the pension roll. In practically all 
other respects, such so-called "limited-contrac- 
tual" systems as actually operative at the present 
time are similar to plans of a "discretionary" 
character. They often reserve a wide measure of 
discretion to the employer as, for instance, the 
right to discontinue a pension in case of "gross 
misconduct" or even in case of acts "prejudicial 

to the interests of the Company." 

87 



88 INDUSTRIAL PENSION SYSTEMS 

Typical provisions in pension plans of this sort 
are as follows: 

"When once an annuity has accrued and been 
granted as a regular allowance, it will be con- 
tinued for the life of the annuitant, subject, how- 
ever, to the provisions of this Plan, as it is in 
effect at the time such annuity is granted." 1 

"The Company reserves its right and privilege 
to discharge at any time any officer, agent, or 
employee as the interests of the Company may 
in its judgment require, without incurring any 
liability because of any pension not actually 
awarded; and also reserves its right to amend, 
alter, or repeal at any time these Regulations or 
any of them as regards all persons who might 
otherwise become entitled to claim thereafter an 
award of pension thereunder, but not so as to 
affect the right of any person to whom a Service 
Pension shall have been awarded, to receive all 
payments of the same promptly and in full." 2 

In one plan of this type provision was made, in 
case the scheme was abandoned, to transfer the 
Pension Fund to a trustee, or to purchase annui- 
ties from an insurance company, for all persons 
to whom pensions had been awarded, in amounts 
equal to such pensions. 

These illustrative clauses show that the con- 
tractual obligation often is of a very limited char- 
acter. Moreover, where companies establish dis- 

1 Standard Oil Company of New Jersey Plan. 

3 Westinghouse Electric & Manufacturing Company Plan. 



"LIMITED-CONTRACTUAL" TYPE 89 

tinct funds segregated from the general funds of 
the corporation, it is sometimes provided that the" 
pensioner shall have no claim on the company 
itself, in case the fund is exhausted. While the 
creation of a fund may really be an additional 
safeguard for the pensioner, such a stipulation 
obviously involves a limitation of the company's 
contractual liability. 

The contractual type of non-contributory pen-* 
sion system is not common. The recognition of 
a definite financial obligation is a burden which 
many establishments are unwilling or feel unable 
to assume. Of eighty-seven non-contributory 
systems in industrial establishments examined in 
the course of this investigation, only twenty- 
seven were of the contractual type. 

Complete acceptance of the contractual prin- 
ciple would require that a payment should be 
made to employees quitting the service, or dis- 
charged, before reaching the retirement age, such 
payments to represent the net accrued value of 
contributions up to that time. Such a payment 
is often referred to as a "withdrawal benefit" or 
"return of contributions," but may better be 
described as a "withdrawal equity," since it is 
supposed to cover a right accrued because of 
service rendered, and since in reality it is in lieu 
of an expected benefit. The inclusion of such a, 



90 INDUSTRIAL PENSION SYSTEMS 

provision adds very considerably to the cost of, 
a pension plan. In addition, there is a general 
unwillingness on the part of employers to pay 
such "withdrawal equities" to workers who are 
separated from the service, prior to their super- 
annuation, either by their own volition, or by 
dismissal. A further argument sometimes ad- 
vanced against such a withdrawal equity is that 
it may actually place an incentive before the em- 
ployee to quit the service in order to get the 
accumulated value of "his equity. 1 This, it is 
argued, not only tends to injure the morale of the 
service, but is likely to lead to the foolish dissi- 
pation of the proceeds by the recipient. 

While these objections are entitled to consid- 
eration, nevertheless, to the extent that the 
principle of deferred pay is actually operative, it 
is difficult to escape the conclusion that where a 
formal pension system is in effect, workers who 
have completed a substantial period of service are 
entitled to such a withdrawal equity, even though 
contributions have been made in part, or entirely, 
by the employer. 

1 Such an objection, it may be noted, was raised by the 
National Civil Service Reform League, as follows: "Any 
retirement scheme which provides for refunds is very objec- 
tionable, because it puts a cash premium upon resignation and 
offers a great temptation to leave the service to those still 
young and capable enough to get outside employment." Nat'l 
Civil Service Reform League. "Superannuation in the Civil 
Service," N. Y., 1906. 



"LIMITED-CONTRACTUAL" TYPE 91 

Comparatively few pension authorities go so 
far as to insist upon this in the case of non- 
contributory schemes and even under contribu- 
tory plans it is not customary for a worker who 
becomes separated from the service before reach^ 
ing the retirement age to receive any part of the 
employer's contribution. 1 

Unless provision is made for at least some 
withdrawal equity in the case of separation, for 
workers who have rendered a considerable length 
of service, the non-contributory system of the 
"limited contractual" type is open to the serious 
objection that it does nothing for the considerable 
number of workers who, though spending a large 
portion of their productive lifetime with a given 
establishment, do not continue until the retire- 
ment age. In so far as the deferred-pay principle 
is operative, a non-contributory pension system 
of the "limited contractual" type thus involves 
the tontine feature, by which many lose and only 
a few win. It is paternalistic; it can easily be 
abused for disciplinary purposes; it tends in gen- 
eral to discourage habits of thrift. Furthermore, 
unless the worker is made to feel that the pension, 
or the withdrawal benefit, has been earned by 
him as part of his compensation, he is in effect 

1 In this connection see p. 207. 



92 INDUSTRIAL PENSION SYSTEMS 

accepting it as a form of bounty from his em- 
ployer. 

For all these reasons, non-contributory systems 
of the "limited-contractual" type, though pos- 
sessing marked advantages over an ordinary "dis- 
cretionary" system, nevertheless fall far short of 
fulfilling the requirements of a satisfactory pen- 
sion plan. 

While such a provision for withdrawal equities 
would remove one of the most serious objections 
to such a system, it seems reasonably certain that 
an employer who is disposed to accept the prin- 
ciple of deferred pay to the extent of providing 
withdrawal equities through surrender of his own 
contributions can accomplish better results, ap- 
parently at less cost, and surely with less uncer- 
tainty, by some other method as, for instance, a 
system of paid-up annuities discussed in Chap- 
ter V. 



CHAPTER IV 

CONTRIBUTORY PENSION SYSTEMS 

Under a contributory system, as already ex- 
plained, part of the cost is directly borne by the 
employee, usually through systematic deductions 
from his pay envelope. In some private systems 
of this type the employee bears one-half the cost. 
In many public service pension systems his share 
is smaller. 

A more vital feature of contributory systems is 
that they recognize a definite right on the part of 
the workers, not only to a retirement benefit, but 
also to a withdrawal equity of some sort. Usually, 
moreover, a death benefit is provided. 1 

1 In all contributory systems, experience has shown that 
eventually the contributors will demand four things: first, that 
if a contributor is dismissed or resigns voluntarily before the 
pensionable age, he shall be paid the amount of his total 
contributions, with interest; second, that if a contributor be- 
comes disabled before the pensionable age, he shall receive 
either a full or a proportionate pension; third, that if he dies 
before retirement, his estate shall receive the amount of his 
total contribution, with interest, or even the amount of both 
his and his employer's contribution, with interest; fourth, that 
if he retires upon a pension, but dies before the total amount 
of his pension receipts equals the amount of his total contri- 
bution, with interest, his estate shall receive the balance. 
(Carnegie Foundation for the Advancement of Teaching. 
Seventh Annual Report of the President, p. 61.) 

93 



94 INDUSTRIAL PENSION SYSTEMS 

Wherever there is reasonable ground for the 
belief that a contributory system will work, there 
are other arguments in its favor as against a non- 
contributory system. A contributory system is 
far less paternalistic; moreover, it tends to em- 
phasize the value of thrift and presumably to 
encourage habits of thrift. It may also tend to 
reduce the financial burden of the employer, but 
this cannot be laid down as certain, since the fact 
that employees contribute may lead them to de- 
mand a more liberal plan than the employer 
would adopt if he financed it alone. 

Most disinterested students of pension prob- 
lems have been strongly in favor of the contribu- 
tory principle, at least in the public service. 
Representative statements by some of these 
writers follow. 

Henry S. Pritchett, of the Carnegie Founda- 
tion: 

"Both the logic of facts and the logic of events 
point conclusively in the direction of contributory 
pension systems. . . . Such a contributory plan 
has all the advantages that are lacking in straight 
pension systems. It encourages thrift; it ensures 
ultimate payment of obligations by contract; it 
affords protection to the employee and his family; 
it provides a pension which the employee can feel 
is not only earned by long service but is his own 
by purchase; and, finally, it brings the employer 



CONTRIBUTORY PENSION SYSTEMS 95 

and employee into mutual relations and gives 
each a more personal interest and confidence in 
the other. Where the number of employees is 
large enough, such a plan, after it has been 
launched on a sound actuarial basis, may be oper- 
ated by individual firms; where the number is 
small, arrangements may be made with insurance 
companies that are undertaking group insur- 
ance of the character described in increasing num- 
bers." 1 

Lee Welling Squier: 

"It is urged that, in this country especially, 
every man is the 'architect of his own fortune'; 
that the provision against want at any period in 
life is an individual obligation; . . . that any 
hope of old age relief from want which is not 
based upon individual thrift, economy, and fore- 
sight decreases efficiency, independence, and man- 
liness; that it is an imposition on the general body 
of our industrial, thrifty population and an 
unnecessary and unwarranted addition to the 
already heavy burdens of the taxpayers to permit 
the shiftless, lazy, and improvident to expect and 
rely on protection against want which they them- 
selves have not secured by their own prescience 
and determination." 2 

Paul Stuolensky, New Jersey Bureau of State 
Research, a well-known writer on pension prob- 
lems: 3 

a The Carnegie Foundation for the Advancement of Teach- 
ing: Eleventh Annual Report of the President, pp. 118r-119. 

2 "Old Age Dependency in the United States," p. 262. 

8 "The Pension Problem and the Philosophy of Contribu- 
tions," pp. 17-18. * 



96 INDUSTRIAL PENSION SYSTEMS 

1. "It is a compromise between the foregoing 
two extreme systems. ('Wholly contributory' 
and non-contributory systems.) * 

2. "It harmoniously combines with social in- 
surance and with its principle that every worker 
must participate in the cost of his protection. 

3. "It is a joint undertaking which involves 
mutual benefits and a two-fold purpose: on the 
one hand, insuring the employees and their de- 
pendents against want in old age, disability, 
death, and — to some extent — resignation and dis- 
missal; on the other hand, facilitating the elim- 
ination of the inefficient from the service and 
promoting an esprit de corps. 

4. "It tends to give both sides an equal voice 
in management. 

5. "It promotes a clear distinction between 
pensions and wages, each side knowing what it 
pays; it is not intended either to reduce or in- 
crease the wages, does not depress the wage, and 
does not become a 'deferred pay.' 

6. "It makes possible the establishment of 
a financially sound system, the cost of which 
amounts to ten or eleven per cent or even more, 
by dividing the cost and requiring the employees 
to pay five or six per cent, as is being done all over 
the world. 2 

7. "Concurrently with its adoption for both 
present employees and new entrants, the old 

1 The designation "wholly contributory" in this case meant 
a system financed entirely by contributions from employees. 

2 This estimate of cost is applicable to public service rather 
than to private industry. 



CONTRIBUTORY PENSION SYSTEMS 97 

Vested rights' and privileges are being swept 
away. 

8. "It is a system which progresses in har- 
mony with social evolution, while the other sys- 
tems are dying, and it expresses the growing 
mutual responsibilities which make for a greater 
democracy and a happier community." 

Deferred-Pay Issue under Contributory Pension 
Plans 

One important argument advanced in favor of 
the contributory plan is that it meets, at least 
in part, the issue of deferred pay. In the case 
of contributory pension systems, the amounts con- 
tributed by the employee obviously are, in a 
technical sense, deferred pay, since they are taken 
out of his current wage to be returned in one form 
or another at a later date. It by no means fol- 
lows, however, that the employee's contributions 
are deferred pay in the sense that they reduce the 
current rate of compensation. As deductions 
from his current pay they do, of course, reduce 
the amount of wages which he receives at the 
time. But there seems no reason to assume that 
they could reduce the rate of wages. Instead, 
under a contributory system the contributions 
of the employee are, essentially, savings invested 
in the purchase of an annuity. As one writer has 
said: 



98 INDUSTRIAL PENSION SYSTEMS 

'The employees' contributions could no more 
be viewed as a reduction of their wage than could 
any savings which they add to their bank ac- 
counts. ... Of course, the contribution slightly 
limits one's immediate use of the wage, but it does 
so in order to insure the employee some satisfac- 
tion of his wants in the future. 

"It is, therefore, not a reduction of the wage, 
but a redistribution of it between immediate and 
future wants." * 

It has, indeed, been contended that a contribu- 
tory system tends to raise the current rate of 
wages, on the ground that workers agreeing to 
make regular contributions would endeavor to 
secure an increase in their rate of compensation 
sufficient to offset these. 

Whether, under a contributory system, the con- 
tribution of the employer tends to reduce the rate 
of wages equally as in the case of a non-contribu- 
tory system, cannot be definitely established. It 
would be easy to argue that the effect would be 
the same in one case as in the other. Some 
students of pension problems, however, instead 
of regarding the employer's contribution under a 
contributory system as taken out of the worker's 
wage, look upon it as an established payment in 
return for which he receives definite advantages 

x Paul Studensky. "The Pension Problem and the Phi- 
losophy of Contributions," p. 14. 



CONTRIBUTORY PENSION SYSTEMS 99 

in the form of better service, or in facilitating the 
removal of inefficient workers. On this point the 
writer just quoted has said: 

"So long as the employee remains in the em- 
ployer's service the two help the realization of 
each other's purpose, for if the government by 
adding a 'pension' to his 'annuity' thereby doubles 
his protection, the employee, on the other hand, 
by adding his 'annuity' to the employer's 'pen- 
sion' thereby doubles the facilities of the govern- 
ment in eliminating the inefficient and improving 
the service in general. A mutual relationship of 
tremendous social consequence is thus established 
between the two." * 

It might seem that this argument would be 
equally applicable to non-contributory systems. 
This view overlooks the important fact that the 
ordinary non-contributory system recognizes no 
contractual right. If the employer is not willing 
to put the pension on a definite contractual basis, 
he cannot reasonably expect, as a direct result of 
a pension system, that cooperation from the 
worker which is essential to increased efficiency 
of service. 

As a rule contributory systems provide for the 
return of the employee's contribution in the event 
of his separation from the service prior to reach- 

1 Paul Studensky. "The Pension Problem and the Phi- 
losophy of Contributions," p. 14. 



100 INDUSTRIAL PENSION SYSTEMS 

ing the retirement age. Few, if any, private pen- 
sion plans provide for return of the employer's 
contribution in such cases. It is the opinion of 
some leading students of the pension problem, 
however, that the employee separated from the 
service prior to reaching the retirement age should 
receive the net amount of not only his own, but 
of the employer's contribution as well. 1 

It may be noted that one of the leading actu- 
aries of Great Britain, James J. M'Lauchlan, in 
outlining what he termed a "model fund," pro- 
vided for the return of the employer's contribu- 
tion in the event of the death of an employee, but 
not in the event of his withdrawal from the 
service. His model fund included the following 
benefits: 2 

(1) "A pension on retirement at any time after 
reaching age sixty; 

(2) "A pension of a reduced amount corre- 
sponding to length of membership, on retirement 
in impaired health before reaching age sixty, 
these pensions to be at a uniform rate per cent per 
annum, on the average salary received during the 
whole period of membership ; 

1 Meriam is one of the few writers who have advocated such 
return of the employer's contribution in the case of contribu- 
tory systems. See his "Principles Governing the Retirement 
of Public Employees," pp. 419-420. 

2 James J. M'Lauchlan. "The Fundamental Principles of 
Pension Funds": Transactions of the Faculty of Actuaries, 
Vol. IV, No. 41. 



CONTRIBUTORY PENSION SYSTEMS 101 

(3) "A return of the employee's own contribu- 
tions without interest, on withdrawal from the 
Fund in consequence of leaving the company's 
service; 

(4) "A return of his own contributions and the 
corresponding contributions of the company with- 
out interest, in the event of death before becom- 
ing entitled to a pension." 

Contributory Pension Systems and Thrift 

An objection often raised against non-contribu- 
tory pensions, as already shown, is their failure 
to stimulate individual thrift. In this respect a 
contributory system has a decided advantage. In 
so far as the employee's contribution is concerned, 
this is essentially a saving and nothing else. 
Moreover, it is a systematic saving. In addition 
to the amounts actually set aside, such systematic 
contributions may encourage the worker to fur- 
ther saving outside of the pension plan. 

The effect of a contributory pension system on 
thrift has been described in a report of the Car- 
negie Foundation as follows: 

"Thrift is a habit, a mental attitude, that grows 
with the opportunities for its exercise and the 
experience of its benefits. The argument that it 
would be wiser to increase wages and leave to the 
individual the provision of his own protection is 
valid for those who already possess the habit of 
thrift, but breaks down for the large majority 



102 INDUSTRIAL PENSION SYSTEMS 

in not providing help for those who may need it 
most, including the man who suffers early disa- 
bility. A contributory plan offers exactly the 
desirable opportunity for developing this habit, 
and has the further value of promoting a sense of 
cooperation and mutual responsibility. It fur- 
nishes the possibility of saving and investment 
that is not open in the ordinary commercial chan- 
nels for men on small fixed incomes." * 



It is furthermore the opinion of many students 
of pension problems that the contributory prin- 
ciple gives a pension system a far greater appeal, 
on the ground that those things are most cher- 
ished which involve personal sacrifice or interest. 
This view is held not only by academic students, 
but by business executives, several of whom after 
trying one kind of so-called welfare work after 
another have stated that they are satisfied that 
little practical benefit is derived from the mere 
handing out of gratuities. 

Progress of the Contributory Principle 

Outside of the field of private industry the con- 
tributory principle has steadily gained prestige. 
Most state commissions which have studied the 
pension problem have favored the contributory^ 

1 Clyde Furst and I. L. Kandel. "Pensions for Public School 
Teachers": The Carnegie Foundation for the Advancement 
of Teaching. Bulletin No. 12, p. 7. 



CONTRIBUTORY PENSION SYSTEMS 103 

plan. The First * Massachusetts Commission 
on Pensions emphatically condemned the non- 
contributory system for state employees, and with 
equal emphasis recommended the adoption of a 
contributory system, which it regarded as essen- 
tially a form of assisted savings. The Illinois 
Pension Laws Commission also endorsed the con- 
tributory principle, as did the Wisconsin Com- 
mission. The Pennsylvania Commission on Old 
Age Pensions, it is true, took a position in favor 
of the non-contributory system, but one member 
of that Commission was an earnest advocate of 
general old age pensions, and there is a strong 
suggestion in the report that the opposition to a 
contributory system was partly a reflection of a 
fear that this might tend to prejudice the adop- 
tion of a general free old age pension. 

The pension system introduced by the United 
States Government in 1920 is of the contributory 
type, as are many of those in operation in vari- 
ous state and municipal services. The contribu- 
tory system is likewise generally favored in public 
service in foreign countries. 

One writer has commented upon this drift 
toward the contributory system, as follows: 2 

*See footnote p. 30. 

2 Paul Studensky. "The Pension Problem and the Phi- 
losophy of Contributions," p. 13. 



104 INDUSTRIAL PENSION SYSTEMS 

"A careful examination of the pension move- 
ment abroad and in this country shows that the 
arguments against non-contributory benefits are 
constantly gaining in weight and that the gov- 
ernment, the employees, and the public at large 
are looking with increasing disfavor upon non- 
contributory systems. The tendency of the entire 
movement leads towards its gradual abandon- 
ment." 

In the case of public service pension systems, 
the contributory principle is making such prog- 
ress that it promises to become practically exclu- 
sive in this field. The contributory system tends 
to meet the objection of the taxpayer that public 
service employees otherwise are constituted into 
an especially privileged class. A further practical 
consideration is that the direct cost to the State 
or the municipality is reduced. 

In private industry the contributory principle 
has made slower progress, although there is some 
evidence that here, too, it is gaining in favor. 1 

As yet, however, contributory systems in pri- 
vate industry are not general. They are fairly 
common in the case of banking institutions which 

1 Thus William R. Willcox, Chairman of the Pension Depart- 
ment of the National Civic Federation, stated on this point: 

"We have verified information in which it had been repre- 
sented to us that the recent tendency of private enterprises 
throughout the world, after a wide period of experience, has 
been to turn from the straight to the contributory system, the 
tax on the industry under the former having become onerous." 
(Address at the Sixteenth Annual Meeting of the National 
Civic Federation, Washington, D. C, January, 1916.) 



CONTRIBUTORY PENSION SYSTEMS 105 

have formal pension systems, but not among 
manufacturing establishments. Of ninety-three 
plans listed in the Appendix only six are of the 
contributory type. Broadly speaking, it appears 
that a contributory plan is best adapted to em- 
ployees of a high order of intelligence, who 
receive relatively good pay and who appreciate 
the advantage of providing against old age, and 
who look upon the system as a form of old age 
endowment insurance. 

Disadvantages of the Contributory System 

Despite the strong a priori arguments in favor 
of a contributory system, it is, in the case of pri- 
vate industry, confronted with numerous practical 
objections. For some industrial establishments 
these objections may be fatal to the success of 
the plan. 

In the first place, experience has demonstrated 
that a contributory system, in order to be suc- 
cessful, usually must be compulsory. The natu- 
ral inclination of members to let payments lapse 
is so great that their good will and self-interest 
cannot be depended upon to keep the plan finan- 
cially solvent. Payments must be regularly kept 
up, for it is only by the compounding of pay- 
ments in early years that the pension obligations 
of later years can be met. 



106 INDUSTRIAL PENSION SYSTEMS 

Again, where labor turnover is high, the admin- 
istrative burden of maintaining a compulsory 
system is a serious consideration for employers. 
Again, with certain classes or racial types of 
workers the task of inaugurating a compulsory 
system is so great as to discourage the employer; 
The introduction of a compulsory system ordi- 
narily will be difficult where women constitute an 
important proportion of the working force, since 
comparatively few of these expect to continue in 
the service until they have reached old age. Still 
again, there may be legal obstacles in the way. 
Thus, the laws of some states do not permit of 
enforced deductions from the employee's wages, 
in order to meet contributions to the fund. 

Under the contributory system there is likely 
to be a demand for joint management of the 
scheme by employer and employee. 

"A contributory pension system maintained by 
joint cooperation of an industrial organization 
and its employees assumes at once a contractual 
relation. In such a case common justice requires 
that contributing employees shall have a hand in 
the management, and that all contributions to 
persons leaving the service be returned with fair 
interest added. Corporations have been slow to 
accept these conditions, not only on account of 
the uncertain financial load involved in the con- 
tributory pensions, but also on account of the 



CONTRIBUTORY PENSION SYSTEMS 107 

hesitation of most organizations to limit their own 
independence of action." * 

Many employers regard this as objectionable. 
Others, however, feel that the cooperation of 
employees is a decided advantage, and even 
essential. An official of a large company which 
has a contributory system in successful operation 
stated that the satisfactory results were largely 
due to the fact that the employees directly par- 
ticipated in the administration of the scheme. 

The contributory system, as already shown, 
places definite contractual obligations upon the 
employer. This is not an objection, if the bene- 
fits are fair. However, under a contributory 
system, especially if the employer bears a large 
part of the cost, there is danger that the workers 
will insist on more liberal benefits as time goes on. 

Conclusions as to Contributory Pension Systems 

From this brief analysis of contributory pension 
systems it may fairly be asserted : 

1. That under a contributory system the 
worker's contribution clearly cannot be regarded 
as deferred pay in the sense of depressing the 
current rate of wages and, furthermore, that the 
employer's contribution may not have the same 

1 Carnegie Foundation for the Advancement of Teaching. 
Seventh Annual Report of the President, p. 59. 



108 INDUSTRIAL PENSION SYSTEMS 

tendency to depress the rate of wages as it does 
in the case of a "discretionary" system. Indeed, 
the contributory system may tend to force an 
increase in money wages sufficient to offset the 
worker's contribution. 

2. That a contributory system, if on a sound 
actuarial basis, with provision for the return of 
contributions in the event of death, resignation, 
or dismissal, is largely free from the objections 
lying against the tontine principle. 

3. That a contributory pension system is com- 
ing to be regarded as virtually a joint savings 
scheme, under which the employee benefits 
through systematic provision for old age, while 
the employer benefits through greater oppor- 
tunity to retire superannuated workers, and in 
other ways to improve the efficiency of his work- 
ing force. 

4. That the system provides a direct incentive 
to thrift, and that the mere fact that the worker 
shares in the expense tends to increase his inter- 
est in the plan, while at the same time reducing 
the element of paternalism. 

5. That the contributory system nevertheless 
has numerous practical disadvantages. To in- 
sure its own solvency it ordinarily must be com- 
pulsory. As such, it is likely to be unfavorably 
regarded by the worker, although not necessarily 
so. 

6. That where the rate of labor turnover is 
heavy, such a system involves a greatly increased 
administrative burden, while the frequent return 



CONTRIBUTORY PENSION SYSTEMS 109 

of contributions to withdrawing members may 
impair the financial stability of the plan. 

7. That it places the employer under definite 
financial obligations of a contractual sort, which 
necessitate a careful administrative supervision 
and heavy and continuing actuarial expense. 

8. That it practically requires participation of 
the workers in its administration : this is regarded 
by some employers as undesirable and as likely 
to lead to undue pressure for increased benefits. 

9. That, notwithstanding these disadvantages, 
the contributory system, because of its recogni- 
tion of contractual rights, the fact that in a large 
measure it meets the issue of deferred pay, and 
that it tends to place part of the responsibility 
for providing against superannuation upon the 
individual, is distinctly superior to an ordinary 
"discretionary" system wherever it can be made 
practically operative. With certain classes of 
workers and under some conditions, however, the 
practical difficulties inherent in the contributory 
plan in the case of industrial establishments may 
be insuperable. 



CHAPTER V 

ANNUITIES AS A 
SUBSTITUTE FOR PENSIONS 

In contrast with the various types of pension 
systems discussed in preceding pages, attention 
may now be called to a system of cumulative 
"single premium" annuities of small amount, issu- 
able year by year as a form of service bonus. 
Such a scheme is a comparatively new develop- 
ment in the field of retirement systems. So far 
as known, it has as yet been put into actual 
operation among wage earners in only a single 
instance, 1 and the insurance companies interested 
are still working on the details of their contracts. 2 
The plan, however, meets so many objections 
raised against pension systems that it seems 
worthy of most careful consideration by em- 
ployers who are interested in the problem of re- 
tiring superannuated or incapacitated employees. 

1 William Edwin Rudge, Inc., New York City, has recently- 
installed such a system. 

a The Metropolitan Life Insurance Company and the 
Equitable Life Assurance Society of the U. S. appear to have 
given chief attention to such an annuity system. 

110 



"SINGLE PREMIUM" ANNUITIES 111 

Features of the Annuity Plan 

In brief, the plan for such a single premium 
service-annuity is as follows : 

Every worker who has completed a limited 
period of service with an establishment (say three 
to five years, roughly covering the period of 
initial heavy labor turnover) would, for each addi- 
tional year, receive a paid-up annuity policy 
assuring him an income of, say, $10 per year, 
beginning at age sixty-five. 1 

As the length of service extended, the accumu- 
lation of such policies would gradually build up 
an income which at the retirement age would take 
the place of a pension. Thus, a worker who re- 
ceived a $10 policy each year for thirty years 
would be assured an income of $300 per year on 
retirement; those remaining for a shorter period 
would have a pro rata amount. 

There would be no conditions attached to the 
issuance of a policy other than the completion 
of an additional year of service. 2 The policy 

'The amount of the annuity and the age limit could, of 
course, be varied as desired. Furthermore, provision could be 
made for commencing annuities in advance of the stipulated 
age, or postponing them beyond it, with a corresponding 
change in the installments of the annuity. However, if the 
age limit is lowered, the installments of the annuity will 
decline in much more rapid ratio, so that it is impracticable 
to anticipate the retirement age more than a very few years. 
(See p. 216.) 

a If desired, annuities could, of course, be issued to cover lesg 
than a full year's service. 



112 INDUSTRIAL PENSION SYSTEMS 

when once turned over to the worker would be 
absolutely his property and could not be for- 
feited. 

The annuity policies would be written by a 
strong insurance company, so that ultimate pay- 
ment would not depend on the financial condi- 
tion of the employer. 

While, for his protection, the employer could 
reserve the right to discontinue the arrangement 
at the close of any year, this would not affect any 
policies already issued. Such a plan, however, 
should never be inaugurated unless the employer 
has satisfied himself, so far as possible, of his 
ability and willingness to continue it for an in- 
definite period. 

Such an annuity scheme, while accomplishing 
many things that pensions are designed to accom- 
plish, is sharply differentiated from the ordinary 
pension system. In the first place, the payment 
is on a contractual basis from year to year. The 
fundamental basis of such a cumulative annuity 
is that continuity of service is worth special 
recognition and that the employer, therefore, is 
justified in paying for such service as a business 
proposition. 

The primary object of such an annuity system 
would be to maintain efficiency by providing an 
equitable method of dismissing superannuated 



"SINGLE PREMIUM" ANNUITIES 113 

and incapacitated employees. Provision against 
superannuation, although a vital feature of the 
plan, is collateral to this object and to the prin- 
ciple of rewarding special length of service. 

A chief justification of such a system, from the 
employer's standpoint, is that workers who con- 
tinue beyond a given limited term save him the 
expense of labor turnover and also, perhaps, be- 
come increasingly efficient. At the same time 
such a system automatically meets the problem 
of superannuation, approximately pro rata with 
the length of service rendered by the worker. In 
the case of workers who had spent practically 
their entire lifetime in the employ of a single 
establishment, the total annuity at retirement 
would be the equivalent of a liberal pension. 
General Arguments in Favor of the Annuity Plan 

Among the advantages urged in favor of such 
an annuity system are the following: 

1. It is a business proposition. The employer 
pays for what he gets: The worker receives com- 
pensation for the service actually rendered. 

2. It eliminates the objectionable "discretion- 
ary' ' feature of many pension systems, since the 
annuity policy once handed the worker is his be- 
yond recall. It, therefore, cannot be used for 
disciplinary purposes. 

3. It does not interfere with mobility of labor. 
The worker is as free to seek another position as 



114 INDUSTRIAL PENSION SYSTEMS 

though the extra compensation were paid in cash. 
If he were separated from the service before the 
end of any given year, he would receive no policy 
for that year, 1 but this would not affect policies 
issued for service already rendered. However, 
precisely because this service annuity is thus paid 
without reservations, it should bring a response 
from the worker far greater than would ordinarily 
be secured under a pension system where the pen- 
sion promise is involved in many uncertainties 
and, moreover, may easily be distorted into a 
threat. 

4. While sharply differentiated from a pen- 
sion, the annuity may provide as effectively as a 
pension for the old age of the worker. 

5. The system is practically relieved of any 
element of charity. Payment would not depend 
upon the necessities of the worker, but would be 
made year by year to all who had rendered an 
additional year's service. 

6. It is equitable as between individuals. 
Those workers who remain with the company 
throughout their productive lifetime would re- 
ceive the largest return. Those who elected, or 
who were forced, to leave the service, would secure 
recognition in proportion to the number of years 
of "annuity service" actually rendered. 

7. It facilitates removal of inefficient workers 
approaching superannuation more effectively 
than does a pension system. As previously 

x That is, on the plan here under discussion. It would, as 
already noted, be possible to draw the plan so that credit 
would be given for a part of a year's service. 



"SINGLE PREMIUM" ANNUITIES 115 

pointed out, under the ordinary pension system a 
humane executive often is tempted to continue 
workers still some distance from the retirement 
age, even though they have become inefficient, 
since otherwise they might completely forfeit 
their pension benefit. If, however, such a worker 
has received a service annuity policy for each 
year of service rendered, his superior obviously 
need have less compunction about dismissing him 
when he is no longer able to do his work 
efficiently. 

8. The system protects the worker against 
forfeiture of pension benefits in the event of dis- 
missal. The policies already earned are actually 
in the worker's possession. Under ordinary pen- 
sion systems, as previously explained, an unfair 
executive may dismiss workers nearing the retire- 
ment age in order to reduce the burden on the 
pension fund. Not only is this practice unjust, 
but it is almost certain to nullify much of the 
good that a pension system might otherwise ac- 
complish. The annuity system, therefore, while 
facilitating the dismissal of workers no longer 
efficient, puts less temptation before the manage- 
ment to dismiss them on financial grounds than 
does an ordinary pension system. It might, how- 
ever, be found desirable to discontinue the pur- 
chase of such policies after some stated age 
because of their increasing cost. 1 

9. Since the annuity policy would be written 
by a strong insurance company, the worker is 
completely relieved of any anxiety as to the re- 
sponsibility of the employer or his continuance 

* For a further discussion of this point, see pp. 123 and 124. 



116 INDUSTRIAL PENSION SYSTEMS 

in business. The establishment might fail, merge 
with another concern, or liquidate, but none of 
these events would affect the value of the annuity 
policies already issued. 

10. The system squarely and effectively meets 
the issue of deferred pay. While it is desirable 
that such annuity should be regarded as a form 
of service bonus, it is possible that on a non-con- 
tributory basis, such a system, because of its com- 
parative certainty, would tend even more than 
a pension system to assume the nature of de- 
ferred pay. The annuity system, however, has 
the great merit that, to the extent that pay is so 
deferred, its eventual return to the worker is 
guaranteed year by year. 1 

11. Tangible evidence of the benefit is brought 
annually to the attention of the worker, thus tend- 
ing to increase his interest and confidence in the 
plan. In this respect the annuity system has a 
great advantage over most pension systems. 

12. Such an annuity system tends directly to 
encourage thrift. This is particularly true if it 
is on a contributory basis. 

13. The system can be made contributory 
without compulsion. Defections from the plan 

*To assure return to estates of members dying before retire- 
ment, the system should provide a death benefit, either in the 
policy or by some collateral arrangement. 

It should be noted that if such an annuity system were on 
a contributory basis, the workers contributing would almost 
certainly demand a death benefit provision. In the opinion 
of some, as noted on page 204, this could best be handled by 
a separate arrangement like group insurance. It is the 
opinion of some authorities, however, that such an annuity 
system on a contributory basis would require a death benefit 
provision in the annuity contract itself. 



"SINGLE PREMIUM" ANNUITIES 117 

by any one individual do not affect the value of 
the annuities of others. It, therefore, has a 
marked advantage in this respect over the ordi- 
nary contributory pension plan, which might be 
wrecked by any considerable number of with- 
drawals and which, for this reason, usually has 
to be on a compulsory basis. Moreover, it could 
easily be arranged that workers who so desired 
could purchase additional annuity policies on 
their own account, in any year or years that they 
were financially able to do this. 

14. From the employer's standpoint the an- 
nuity system has the great advantage that the 
cost can be figured much more accurately than 
the cost of a pension system, and that no further 
contractual liabilities are incurred. Each year's 
arrangement is a closed and completed transac- 
tion. While a discontinuance of the plan is to 
be avoided, if possible, nevertheless if it is un- 
avoidable the employer winding up the plan has 
no long distance liabilities confronting him. 

15. In time of emergency the annuities could 
be omitted for a year or two without wrecking 
the system. Moreover, it might be possible to 
make them up in some exceptionally good year 
or years. 

16. There is practically no actuarial expense 
other than that included in the cost of the an- 
nuity policies. Moreover, the administrative 
burden is very materially reduced, since the great 
bulk of the work would be conducted by the in- 
surance company underwriting the plan. 

It is apparent, therefore, that as compared with 



118 INDUSTRIAL PENSION SYSTEMS 

the ordinary pension system such a system of 
cumulative service annuities has a strong ap- 
peal. Against the advantages thus claimed for 
the system, however, are some disadvantages. 

Arguments against the Annuity Plan Analyzed 

One objection certain to be raised by some em- 
ployers is that it is not good business to purchase 
annuities for men who will leave their employ 
before reaching superannuation. This is a prac- 
tical consideration. Out of a group of, say, one 
hundred members of even the "stabilized" por- 
tion of the working force, a considerable number 
will, for one reason and another, leave long be- 
fore they become superannuated. The employer 
justly raises the question whether there is any 
real advantage to him in purchasing annuities for 
such men. At first sight the payments represent 
a needless outgo. If, however, the cost of the 
deferred annuity is considered as extra compensa- 
tion earned by continued service, this objection 
loses its force, since the employer is not injured 
any more than he would be had he paid the cost 
of this annuity in the form of a cash bonus. If, 
on the other hand, the deferred annuity actually 
comes out of the worker's wage, the employer, as 
a matter of equity, should be as ready to pay 



"SINGLE PREMIUM" ANNUITIES 119 

this portion of the wage as any other. The 
worker, it is true, might be disposed to object to 
such an annuity if he felt that it did depress his 
current cash wage. If, however, the plan were 
properly presented to him, he might willingly ac- 
cept such postponement of a part of his wage, in 
view of the definite assurance that he would even- 
tually get it back, and of the feeling that he was 
making provision for his superannuation without 
any element of charity. It would seem that the 
wisdom of introducing such a plan on a non-con- 
tributory basis is largely dependent upon the ac- 
ceptance of this principle by the worker. In other 
words, the annuity should be recognized by 
both employer and employee as a special wage, 
and placed on a contractual basis from year to 
year. 

Another objection likely to be raised against 
the annuity plan here discussed is that the cost 
of each successive annuity policy for any indi- 
vidual worker steadily increases with his age, and 
that, in the case of workers nearing the retire- 
ment age, the cost becomes very high. Thus, 
whereas one type of paid-up annuity policy pro- 
viding for an annuity of $10 commencing at age 
sixty-five would cost only $10.51 for a worker at 
age twenty, the cost of such a policy at age sixty 



120 INDUSTRIAL PENSION SYSTEMS 

would be approximately $69. 1 On the surface, 
therefore, the annuity plan contemplates an in- 
creased annual payment for those workers whom 
it is relatively least desirable to retain, namely, 
those approaching old age. 

Against this objection it may be urged that the' 
high cost of annuities at these later ages is appar- 

1 The cost depends, of course, on many things, especially the 
nature of the benefits included. The following schedule pre- 
pared by a large life insurance company illustrates the way 
in which the cost of successive policies increases with the age 
of the worker. The costs here given are for a retirement 
benefit only and do not include a death benefit, or a disability 
benefit. 

Table 1. Schedule of Considerations {for males) at various 
ages necessary to provide a paid-up annuity of $10 per 
annum to commence at age 65. 



Age 




Age 




Age 




Near- 
est 
Birth- 


Considera- 
tion 


Near- 
est 
Birth- 


Considera- 
tion 


Near- 
est 
Birth- 


Considera- 
tion 


day 




day 




day 




15 


$8.52 


32 


$17.55 


49 


$37.94 


16 


8.88 


33 


18.32 


50 


39.85 


17 


9.26 


34 


19.14 


51 


41.89 


18 


9.66 


35 


19.99 


52 


44.07 


19 


10.08 


36 


20.89 


53 


46.41 


20 


10.51 


37 


21.83 


54 


48.91 


21 


10.97 


38 


22.81 


55 


51.60 


22 


11.44 


39 


23.85 


56 


54.51 


23 


11.94 


40 


24.94 


57 


57.64 


24 


12.46 


41 


26.09 


58 


61.05 


25 


13.00 


42 


27.30 


59 


64.74 


26 


13.56 


43 


28.58 


60 


68.78 


27 


14.15 


44 


29.92 


61 


73.20 


28 


14.77 


45 


31.35 


62 


78.06 


29 


15.42 


46 


32.85 


63 


83.42 


30 


16.10 


47 


34.45 


64 


89.37 


31 


16.80 


48 


36.14 


65 


95.53 



"SINGLE PREMIUM" ANNUITIES 121 

ent rather than real, since the company will have 
had the use of the money, and presumably at a 
higher rate of profit than the rate of accumulation 
at which annuities are figured. For example, the 
sum of $16.10, which represents the cost of such 
a policy for a male worker under one plan at age 
thirty, would amount to, roughly, $52.50 in thirty 
years if compounded at four per cent. The cost 
of such an annuity policy at age sixty, would, as 
just shown, be about $69. Assuming, however, 
that the company had been able to earn an aver- 
age profit of ten per cent on $16.10 over a thirty- 
year period, the accumulated amount would be 
about $280, or several times the cost of a $10 
annuity for a worker at age sixty. Even if the 
company earned only six per cent on such a sum, 
the accumulated value over a thirty-year period 
would be approximately $92.50. Viewed from 
this standpoint, annuities purchased for workers 
at advanced ages actually cost the company less 
than those purchased at much lower rates when 
these workers were young. 

As a practical matter, however, this argument 
probably should be disregarded as an employer 
is likely to be more impressed by the immediate 
high cost of annuities for such older workers than 



122 INDUSTRIAL PENSION SYSTEMS 

by the fact that he has had the use of the money 
over a long period of years. 1 

A feature of such a cumulative annuity system 
is that the total income, on retirement, of workers 
who do not enter the company's service until well 
along in life may be comparatively small, and less 
than the allowances paid under some pension sys- 
tems. Against this, however, is the fact that the 
annuity plan confers benefits on a much larger 
number of workers, and that the total amount 
of the annunity runs approximately pro rata with 
the years of service rendered. Because the sys- 
tem reaches a larger number of workers, the cost 
may, and presumably will, be greater than the cost 
of an ordinary "discretionary" pension system, 
where the benefit will be paid merely to the few 
who continue until the retirement age. 

In some cases as, for instance, especially valu- 
able workers who have served only a few years, 

1 The purchase of such annuities might be discontinued when 
the worker had reached a given age, say fifty-five years. Such 
a provision could be justified both on the ground of the imme- 
diate cost of such annuities beyond that age, and also on 
the ground that there is no particular value in continuity of 
service beyond such an age which would warrant additional 
compensation. 

While, however, the cost of individual annuities purchased 
prior to age fifty-five would be less than if purchased at a 
later age, this method might require the withdrawal of a 
larger total amount of funds from the company's treasury each 
year, since, in order to provide the worker with an income of 
a substantial amount on retirement, the individual policies 
should be for a larger amount than where the purchases were 
continued up to the retirement age. 



"SINGLE PREMIUM" ANNUITIES 123 

it is possible that an employer will feel disposed 
to pay a somewhat larger annuity on retirement 
than the terms of the plan strictly demand. To 
the extent that this is done, the payment loses 
part of its contractual character and assumes the 
nature of a gratuity. This practice would, of 
course, increase the cost of the system. How- 
ever, there is no reason why such an annuity plan 
should cost more than a pension plan which pro- 
vides corresponding benefits. Indeed, as shown 
later, it may cost less. 1 

An advantage of the annuity system, already 
noted, is that it is possible to operate it on a 
contributory basis without making the contribu- 
tory feature compulsory. Since each year's pur- 
chase is a completed transaction in itself, defec- 
tions from the plan, while reducing the aggre- 
gate benefit of the individual withdrawing, would 
not prejudice the benefits of those who continue. 
It has been urged, however, that the contributory 
principle would be greatly hampered, if, indeed, 
not defeated, because of the rapidity with which 
the cost of individual annuities increases as the 
age of the worker advances. For instance, a 
worker at age thirty might find no difficulty in 
meeting one-half the expense of an annuity cost- 
ing at that age, say, $16, but might be quite un- 

'See p. 191, 



124 INDUSTRIAL PENSION SYSTEMS 

able to meet one-half the cost of a similar annuity 
at age sixty when the rate would be, say, $69. 

There seems to be little doubt that for workers 
approaching the retirement age this steady and 
rapid increase in cost often would be too heavy 
a burden and would place a strong temptation 
before them to withdraw from the scheme. 

One method of meeting this difficulty is to pro- 
vide that the worker shall not be required to con- 
tribute at any time more than some fixed sum, 
or, say, one-half the cost of the first annuity pur- 
chased in the series; that is, all of the increase 
in cost from the time the worker came into the 
plan would be borne by the employer, in addition 
to an amount representing one-half of the cost 
of the first annuity. 1 Such a provision could 
easily be justified on the ground that, as the 
worker's period of service lengthens, he saves the 
employer an increasing amount because of reduced 
labor turnover, and that it is only equitable that 
the employer should recognize this by bearing a 
larger share of the cost of the annuity policy. 2 

1 This would mean that if the first annuity, say at age forty, 
cost $25, the employer would pay S12.50, while for a similar 
annuity costing $69 at age sixty, he would pay $56.50, the 
employee's share remaining unchanged throughout the period 
at $12.50. 

2 Or, if as suggested above, the purchase of annuities were 
discontinued at age fifty-five, this would reduce the immediate 
cost to the worker, since prior to that age the cost of annuities 
is less. Under such an arrangement the drain on the worker 



"SINGLE PREMIUM" ANNUITIES 125 

The further objection sometimes has been raised 
against such an annuity system that its cost would 
tend to increase, because workers would be in- 
duced to remain in the service longer than would 
otherwise be the case. This in reality is no ob- 
jection at all, because continuity of service, so 
long as the worker is efficient, is precisely what 
the employer desires. If the plan results in in- 
creasing the length of service, he can afford to 
pay, at least up to some age limit. 

It should be emphasized that the objection 
sometimes raised against a withdrawal equity in 
the case of a pension system, on the ground that 
workers will quit the service in order to secure 
the benefit and spend it for some needless luxury, 
can readily be avoided in an annuity system by 
the insertion of a provision in the policies to the 
effect that they cannot be surrendered for cash. 
Such a provision seems highly desirable from the 
standpoint of the worker's real interest. Indeed, 
such a deferred annuity policy ordinarily would 
not carry a cash surrender provision. 

Still another objection has been made against 
the annuity system that many workers, owing to 
change of employment, would receive only a very 
few annuity policies, and would be careless in 

would come in the prime of life, which ordinarily is the best 
time for him to make provision against old age. 



126 INDUSTRIAL PENSION SYSTEMS 

keeping track of these, so that the "lost policy" 
problem would be a source of considerable diffi- 
culty. There can be no doubt that this objection 
has some force. This should, however, be re- 
duced in proportion as such a system was in 
general operation: that is to say, while a worker 
who received only two or three policies might not 
be careful to preserve them if he never expected 
to receive any more, he would have a distinct 
incentive to take care of them if he expected to 
receive others like them from the next establish- 
ment in which he was employed. 

Summary and Conclusions 

All these, however, are matters of detail which 
do not have a vital bearing upon the merits of 
the plan. In view of the fact that such a system 
provides with certainty for payments; that it 
affords something like equal justice to all workers 
pro rata with service rendered; that its cost per 
individual worker also tends to run somewhere 
nearly pro rata with length of service; that it 
squarely meets the issue of deferred pay; that 
it has no strings, reservations, or implied threats; 
furthermore, that it can be made contributory 
on a voluntary basis, it would appear that such 
a method of meeting the retirement problem has 
many attractive features. At least it would seem 



"SINGLE PREMIUM" ANNUITIES 127 

that the system should be most carefully studied 
by all employers who are disposed to introduce 
some systematic method of dealing with the prob- 
lem of retirement. 

Such an annuity system would have an increas- 
ing appeal in proportion as its adoption became 
general among industrial establishments. Under 
a general adoption of the system benefits would 
not be terminated by change of employment. In- 
stead, each year of service wherever rendered (ex- 
cept for the trial or waiting period) would be re- 
warded with an annuity policy. Therefore, with 
such a system in general operation, the great body 
of industrial wage-earners would be making some 
systematic provision against old age, whereas the 
ordinary pension system provides, broadly speak- 
ing, for only a handful. Consequently, such a sys- 
tem, if in general use, should go a long way toward 
solving the problem of old age dependency among 
industrial workers. Furthermore, each employer 
would feel under no obligation to do more than 
his pro rata share. 

Perhaps the most important question is the ef- 
fect of such a cumulative annuity system upon 
the morale of the worker himself. If the annuity 
policies should be regarded by the recipients as 
mere gratuities, there is grave reason to fear that 
the system might accomplish more harm than 



128 INDUSTRIAL PENSION SYSTEMS 

good. In the long run, no class can accept a gra- 
tuity from another class without accentuating 
class distinctions. Unless, therefore, this annuity 
plan can be shown to be less objectionable on 
this score than the ordinary pension system, its 
adoption would be a matter of very doubtful 
wisdom. 

If, however, the worker is made to feel that the 
annuity policies received each year have been 
earned by him by his continued service, and are 
not a gift, there would seem to be no reason why 
the system should undermine his self-respect. It 
seems entirely practicable to place the system on 
such a plane. Even on the non-contributory plan 
such an annuity policy should not constitute a 
gratuity, for it is on a contractual basis. If it 
actually represents compensation, in addition to 
the "going" rate of wages, to cover a special qual- 
ity of service — continuity — it is essentially a 
special wage. If, on the other hand, because of 
the deferred-pay principle, it operates to depress 
the current wage, it clearly is not a gratuity. 

Any difficulty on this score would largely be 
removed if the worker could be induced to con- 
tribute, if not half, at least a portion, of the cost 
of each year's annuity, or to purchase additional 
annuities from his own funds. The employer 
could justify the requirement of a contribution on 



"SINGLE PREMIUM" ANNUITIES 129 

the ground that it is a primary duty of the em- 
ployee to provide for his own old age. On the 
other hand, the employer could justify his own 
contribution to such a plan as a matter of busi- 
ness, on the ground that workers who thus con- 
tinued in his employ saved him expense, because 
of the consequent reduction in labor turnover, and 
that the system enables him to meet the problem 
of superannuation, while, by giving the worker 
assurance of support in old a£e, it may tend to in- 
crease his contentment and efficiency. 

Final judgment as to the wisdom of inaugurat- 
ing such an annuity system will depend, to a large 
extent, on the broad question whether it is not 
better to throw responsibility for support in old 
age entirely upon the worker, even though, as a 
matter of fact, he frequently will have to resort 
to public charity. Some employers, moreover, are 
of the opinion that it is desirable to limit the con- 
tractual relationship between employer and em- 
ployee, so far as possible, to the single question of 
wages, and that the inclusion of collateral issues 
increases the likelihood of friction. 

From the standpoint of Labor, as clearly shown, 
it has frequently been urged that what the worker 
wants is a maximum wage rather than collateral 
benefits, such as insurance or pensions. If all 
workers actually were provident, it would be dif- 



130 INDUSTRIAL PENSION SYSTEMS 

ficult to challenge this attitude. The practical 
difficulty, already emphasized, is that, regardless 
of the wages paid, a considerable number of work- 
ers will arrive at old age in a condition of de- 
pendency, so that the employer is still confronted 
with the superannuation problem. In many cases, 
therefore, it becomes a question of deciding be- 
tween some formal retirement system or an in- 
formal policy. The advantages and disadvantages 
of an informal policy are discussed in the follow- 
ing chapter. 



CHAPTER VI 

AN INFORMAL PENSION POLICY VERSUS A FORMAL 
SYSTEM 

Many employers who keenly feel the problem 
of providing for the superannuation of their work- 
ers and who desire to do something to meet it 
have preferred to take any action in a wholly in- 
formal way, varying the amount of the payment 
in individual instances according to circumstances. 
In many cases this practice has come about 
naturally, without much consideration of the mer- 
its of a formal system. In other cases, however, 
decision to rely on an informal policy has been 
reached only after careful study of the pension 
problem and of the merits of a formal system of 
some sort. 

Thus, one employer who has devoted a large 
amount of study to the question, and who has 
served on a State Pension Commission, said : 

"We have no rigid or definite pension system. 
We do, however, have a more or less informal pen- 
sion policy, under which aged workers are taken 
care of according to their need. 

131 



132 INDUSTRIAL PENSION SYSTEMS 

"I am positively of the opinion that a pension 
cannot be claimed by an industrial worker as a 
right. At the same time it is good business for 
an organization like ours to take care of its super- 
annuated workers, not on the ground of kindness 
or charity, but on the practical ground that it in- 
creases the good will of the working force. I be- 
lieve, moreover, that good will is increased to a 
greater degree by an informal method of pension 
than by a rigid system where pensions are paid 
more or less without regard to the merits of the 
persons receiving them. I think it is a mistake 
to make any stir over the fact that pensions are 
paid. The recipients themselves are the best of 
advertisers, and the fact that the company takes 
care of its superannuated workers will become 
known to the entire force in a very effective way. 

"In my judgment, pensions should be based on 
the merits or needs of the individual pensioner, 
and not as a reward for long service. Where a 
pension is paid because of length of service it be- 
comes in effect a deferred wage and is bound to be 
so considered. The inevitable tendency will be 
that the pension will be taken account of by the 
wage-earner in making his wage bargains. This 
I regard as undesirable. 

"The pensions paid by our establishment have 
been paid only after a very careful canvass of the 
situation in particular cases. The aim has been 
merely to give a sufficient amount to enable the 
recipient, with any other income which he or she 
may have, to live on the basis of a reasonable 
minimum of comfort. If, for instance, it is known 
that the worker has accumulated some funds, or 



AN INFORMAL PENSION POLICY 133 

has some other means of income, the pension is 
made very small. In other cases it is more liberal. 
In some cases pensions have been increased m 
recent years to allow for the increase in cost of liv- 
ing. On the other hand, in two cases pensions 
have been reduced." 

Several other employers, after carefully study- 
ing the pension problem, have thus far decided 
against introducing a formal system. Some of 
these doubtless have an informal pension policy. 

Among advantages claimed for an informal 
policy as against a formal system are: 

1. Complete freedom from contractual obliga- 
tion. 

2. Avoidance of the issue of deferred pay. 
Since pensions would in no individual case be 
assured, the worker would not be disposed to ac- 
cept a reduced rate of compensation. 

3. Greater discretion as to the amount and 
conditions of the benefit, and thus better control 
of the cost. 

4. Freedom from demands for increased 
benefits. 

5. Greater freedom in hiring workers of ad- 
vanced years ; under a formal system there would 
be a tendency not to take on such workers. 

6. Greater good will value. Benefits dis- 
tributed under an informal policy are, it is urged, 



134 INDUSTRIAL PENSION SYSTEMS 

likely to be more appreciated than where they 
are counted upon long years ahead under some 
formal plan, and where, when received, they may 
be looked upon as disappointing. 

7. In years of stress the benefits can be modi- 
fied without causing as much dissatisfaction as 
would result from a change in a formal plan. 

Among disadvantages urged against an infor- 
mal policy are : 

1. That in a large establishment it is difficult 
to get into sufficiently close touch with the 
workers to ascertain their needs accurately. 

2. That the administrative burden of consid- 
ering the merits of individual cases is unduly 
heavy. 

3. That payments become a pure charity and 
thus tend to humiliate the worker, and to accen- 
tuate class distinctions between employer and 
employee. 

4. That the informal policy has a very narrow 
appeal and consequently brings little response 
from the members of the active force. 

5. That an informal policy in effect discrim- 
inates in favor of the shiftless and improvident 
workers, as against the thrifty. 

6. That the benefits are likely to be inade- 
quate. 



AN INFORMAL PENSION POLICY 135 

7. That the distribution of benefits is likely 
to be influenced by favoritism of executives whose 
opinions must largely be depended upon, and that 
discrimination and dissatisfaction may thus be 
created. 

8. That a large concern may lose in prestige, 
on the ground that it is not keeping abreast of the 
times if it does not have a definite retirement 
system. 

The force of these various arguments will de- 
pend to a considerable extent on conditions in 
the individual establishment. Thus, in an or- 
ganization with a large number of plants and with 
tens of thousands of workers, where even execu- 
tives of the second or third rank may not come 
in direct contact with the employees, it would be 
necessary under an informal policy to throw much 
responsibility on subordinates. In these cases 
there is a very strong likelihood that a lack of 
uniformity will result. In a smaller organization, 
or one where the plant managers are in close con- 
tact with the workers, on the one hand, and with 
the Board of Directors, on the other, the difficul- 
ties on this score are less. 

From the standpoint of direct financial outlay, 
an informal policy has an advantage over a for- 
mal system, since to a considerable extent the 



136 INDUSTRIAL PENSION SYSTEMS 

cost can be controlled by the management. If, 
however, this results in retaining inefficient 
workers on the payroll, the saving in direct cost 
may be more than offset by a loss in efficiency. 
Moreover, even under an informal policy, the 
benefits must be fairly substantial and the cost 
of the scheme must bear some reasonable relation 
to the number of workers needing assistance at 
retirement. 

The advantage of an informal policy in permit- 
ting the hiring of old men is apparent. There can 
be little question that it is far better to provide 
jobs than to provide pensions. While in many 
industries there is an indisposition to hire men 
over fifty-five years of age, others find that they 
can advantageously use men much older than 
this. If, however, such an establishment adopts 
a formal pension system, it will be much less 
likely to hire old men, and this even though it 
definitely announces that such workers will not 
be allowed to go on the pension roll. The man- 
agement will be fearful that some of these older 
workers will, as a matter of fact, eventually have 
to be pensioned, while the great body of workers 
will take the ground that pension benefits should 
go to those who spend the greater part of their 
lives in the service of the company. There will, 



AN INFORMAL PENSION POLICY 137 

therefore, be pressure to discourage the hiring of 
men of advanced age. 

Of the objections to an informal policy, one 
urged with special emphasis is that there is likely 
to be serious discrimination in the distribution of 
benefits, either through deliberate favoritism on 
the part of subordinate executives, or through in- 
ability to determine with any reasonable accuracy 
the conditions affecting particular individuals. 
Yet in this respect a formal system of the "dis- 
cretionary' ' type seems to offer little advantage 
over an informal policy. As previously pointed 
out, one type of executive may keep on the pay- 
roll, until he reaches the retirement age, a worker 
who really should be dismissed, while another 
may dismiss a worker amply able to perform his 
task, either to reduce the pension expenditure or 
for other reasons. 1 

The objection that pensions under an informal 
policy become a mere charity is regarded by some 
as vital. Others, however, regard them not as a 
charity but as a means of building up good will. 
Under a pension system of the "discretionary" 
type the benefits are made to appear as a gratuity 
or charity and, moreover, as a charity of an osten- 

1 In the public service the danger of favoritism is far greater. 
Indeed, an informal policy is not a practical method of deal- 
ing with the superannuation problem in government service. 



138 INDUSTRIAL PENSION SYSTEMS 

tatious sort. Yet, as a matter of fact, as clearly 
shown in Chapter II, they may actually be paid 
for by the worker. In the case of an informal 
policy there is no reason why the payment should 
thus assume the nature of deferred pay to the 
extent of depressing the current wages, since very 
few workers will ever receive a benefit and since 
no worker can count with assurance on receiving 
one. 

Where an informal policy is used, the employer 
should be extremely careful not to hold the pros- 
pect of a pension before his employees in any 
definite way, since, to the extent that he does this, 
there is danger that it will come to be relied upon 
and thus assume the nature of deferred pay. In- 
stead, his attitude should be that provision against 
superannuation is the duty of the individual 
worker. Under an informal policy, it should be 
understood that the pension is in the nature of 
good will, and is in no way a contractual arrange- 
ment. 

One practical disadvantage of an informal 
policy, although not inherent, is that the manage- 
ment will be disposed to estimate the probable 
cost by some rule of thumb, only to find in a short 
time that the outlay is running far beyond expec- 
tations. It is important, therefore, that the man- 
agement, in fixing the broad lines of such a policy, 



AN INFORMAL PENSION POLICY 139 

recognize clearly that the outlay will to a greater 
or less extent reflect the actuarial features of a 
formal system, particularly in respect to a continu- 
ing increase in cost over a long period of years. 1 
This difficulty need not be a serious one in the case 
of small establishments, provided estimates are 
frequently revised. In very large establishments, 
however, this question may easily prove an 
embarrassing one under an informal policy. 

Some objections to an informal policy as com- 
pared with a formal plan were outlined by the In- 
dustrial Bureau of the Merchants' Association of 
New York as follows: 

a The pension system gives the employee grow- 
ing old in his employment an assurance of a 
definite income after retirement, while the infor- 
mal method gives such an employee only the hope 
that the employer will have appreciated his 
services sufficiently to reward him to some extent. 
The difference to the faithful employee who is 
growing old is very great indeed. 

"Undoubtedly the average employee prefers to 
retire under the provisions of a regular pension 
system rather than through the munificence of 
the employer. Pension payments are considered 
to be only what is due the employee — a normal 
part of his return whicn he has earned by faithful 
and long service ; informal pensions, even if oper- 
ated with the greatest tact and kindliness on the 

"See p. 157. 



140 INDUSTRIAL PENSION SYSTEMS 

part of the employer, savor much of charity to 
the employee. Surely no employer who so appre- 
ciates the value of long and faithful service in an 
employee that he will make a substantial retire- 
ment gift, would knowingly prefer to make it 
under circumstances which are disagreeable to the 
recipient. 

"Most pension systems state that the employer 
is under no legal obligations whatsoever, yet no 
reputable concern would consider stopping pension 
payments to employees. Under an informal 
method, the beneficiary is by no means certain of 
receiving continued assistance. The management 
with which the former employee has had intimate 
association may be superseded by persons who 
have no special interest in the aged beneficiary. 

"In the large industrial concerns where the man- 
agement is centralized and the workers are numer- 
ous and spread through many departments or 
plants, and where close contact between the man- 
agement and the men is impossible, the informal 
method is obviously inadequate. On the one 
hand, it fails to assure the employees that all of 
them will be cared for as they are entitled to 
expect; on the other hand, the work of adminis- 
tering it is too cumbersome. Furthermore, the 
large corporation finds that it can conduct its 
affairs efficiently and economically only through 
uniform methods, the cost of which can be esti- 
mated in advance with accuracy. In this respect, 
the pension plan is superior to the informal 
method." 

While these objections are entitled to respectful 






AN INFORMAL PENSION POLICY 141 

attention, some of them are open to criticism. It 
will be noted that this statement asserts that "a 
pension system gives the employee growing old 
in his employment an assurance of a definite in- 
come after retirement." In view of what has been 
set forth in previous chapters this statement can- 
not be held to apply to the ordinary pension sys- 
tem of the "discretionary" type. Some of these, 
indeed, give little more assurance, in reality, than 
an informal method. 

Likewise the statement that "no reputable con- 
cern would consider stopping pension payments to 
employees" is open to question. Certainly the 
majority of pension plans specifically stipulate 
that payments may be so terminated. Moreover, 
where a change in the rules is made, as has been 
done in some cases, by which the age and service 
requirements are lengthened, the inevitable effect 
is to deprive a number of employees of the pension 
which they would have obtained under the 
original plan, the prospect of which may have been 
an important inducement to continuance in the 
service. Such a change in the rules, while perhaps 
in accord with the letter of the plan, can hardly 
fail to seem unjust to the worker who thereby 
loses his pension. 

As to the contention in the statement just 
quoted that the work of administering an informal 



142 INDUSTRIAL PENSION SYSTEMS 

policy in large concerns is too cumbersome, it must 
be remembered that no pension system operates 
automatically. Even under a formal system indi- 
vidual cases will have to be passed upon by the 
pension committee or pension board, while in any 
establishment there will be from time to time 
workers who, though not strictly entitled to a 
pension under the rules, will, nevertheless, for one 
reason or another, call for special consideration by 
the pension authorities. In other words, even 
under a formal plan, there will be a considerable 
number of special cases which will call for indi- 
vidual attention. 

For a concern of moderate size it may safely be 
asserted that the administrative burden is much 
smaller under an informal policy than under a 
formal pension system. The head of a company 
with several thousand employees stated that under 
its informal pension policy the Board of Directors 
were required to give only a negligible amount 
of time to consideration of pension cases. He 
further contended that there is no serious diffi- 
culty, even in a larger establishment, in getting 
into sufficiently close contact with the worker to 
make an informal policy entirely practicable. 

Unless the number of workers is so great as 
practically to compel the adoption of a formal 
system, the use of an informal policy can largely 



AN INFORMAL PENSION POLICY 143 

be determined by the purpose which the employer 
seeks to accomplish. Where the primary object is 
to relieve actual distress of faithful workers who 
have rendered unusually long service, an informal 
policy has many attractions. It obviously will 
not be the equivalent of a formal retirement sys- 
tem recognizing contractual rights. If, however, 
the intention of the employer is to reward all 
workers who render an unusual length of service, 
regardless of their financial condition at the time 
of retirement, then it is reasonably certain that 
an informal system will be too inadequate and 
too cumbersome to meet the needs of a large estab- 
lishment. 



CHAPTER VII 

COST OF PENSION SYSTEMS 

Although the question of cost obviously is a 
vital and, indeed, often a controlling consideration 
in deciding on the adoption of a pension system, it 
is entirely safe to say that a great majority of 
such systems have been started without any accu- 
rate conception of the ultimate outlay involved. 
As an inevitable result, as already noted, a large 
number of pension schemes, both public and pri- 
vate, have come to grief. 

The determination of the cost of a pension sys- 
tem for any individual establishment is a highly 
expert actuarial task and, at best, involves many 
uncertainties. Expenditures under a pension plan 
project far into the future and ordinarily increase 
for a long period, so that the "peak of the load" 
is not reached until forty or fifty years, or per- 
haps even more, after the sytem is started. 1 
Exact calculations are, therefore, quite impossible. 
About the only thing that can be said with posi- 
tiveness on this score is that all worth-while pen- 

1 In this connection see p. 157. 
144 



COST OF PENSION SYSTEMS 145 

sion schemes are expensive. Obviously, much 
depends upon the scope of the plan and the char- 
acter of the benefits provided. Many pension 
plans include benefits which in a strict sense are 
not pensions proper, but are in the nature of sav- 
ings or life insurance. All these features tend to 
increase the cost. 

No reliable estimate of the cost of a pension sys- 
tem in any individual case can be made without 
most careful study of the particular facts as to the 
ages of the workers, sex distribution, rates of labor 
turnover, and various other details. Actuaries are 
agreed that there is no pension formula capable 
of general application. The cost of a pension sys- 
tem in one establishment might be very radically 
different from the cost of an identical plan in 
another establishment where employment condi- 
tions on the surface might seem very similar. 

Starting with a given scheme of benefits, how- 
ever, it is possible to present general estimates of 
the cost of a pension plan which will afford the 
employer some rough measure of the probable 
financial burden involved. 

The immediate cost of a pension system will 
depend on the method of financing. If no pro- 
vision is made to meet the liability in advance, 
the cost will be much greater than where a fund 
is gradually built up on the compound interest 



146 INDUSTRIAL PENSION SYSTEMS 

principle. For example, an annual contribution 
to a pension fund equivalent to two per cent of 
the payroll should yield an income sufficient many 
years later to meet pension disbursements that 
would then be equal to a much larger percentage 
of the payroll of a force of the same size and gen- 
eral character. 

Methods of Financing a Pension Scheme 
The method of financing a pension plan is there- 
fore of primary importance. Four principal 
methods may be indicated : 

1. The setting aside at the outset of a fund 
large enough to provide an income sufficient to 
meet the pension disbursements. 

2. The setting aside of a smaller fund, supple- 
menting this with annual appropriations. 

3. Annual appropriations, without a fund, to 
meet each year's expenditures as they arise. 

4. The building up of a fund on an actuarial 
basis by setting aside such percentage of every 
worker's pay as actuarial estimates indicate will 
be necessary to provide the pension. This scheme 
may be supplemented by a lump-sum fund at the 
start. 

The first of these methods will seldom be prac- 
ticable. In the case of an establishment of mod- 
erate size, the setting aside of an adequate sum 



COST OF PENSION SYSTEMS 147 

would seriously, if not hopelessly, embarrass the 
company in its business. Even in the case of ex- 
ceptionally large and strongly financed companies, 
moreover, it will be very difficult to make certain 
that any fund, so set aside, will prove adequate. 

The second method is much better, but still 
uncertain, as there is no assurance that the appro- 
priation of each successive year will not have to 
be greatly increased. 

The third method is highly objectionable, as 
practically certain to land a pension scheme on 
the rocks of business depression, or of unforeseen 
expenditure. 

Of all methods the fourth is the one usually 
recommended by pension authorities where a 
formal system is introduced. It involves extensive 
actuarial estimates, and a heavy administrative 
burden, with periodical revisions of the original 
estimates. This, however, is the price which an 
establishment setting up a formal pension system 
must expect to pay. This actuarial burden is 
largely obviated in the case of a paid-up annuity 
system. 

By this actuarial, or "reserve," method the total 
fund to be built up is the sum of the amounts 
necessary in each individual case as indicated by 
calculations taking account of age, expectancy of 
life, and various other factors. Such a fund, 



148 INDUSTRIAL PENSION SYSTEMS 

therefore, is in theory sound, provided the plan is 
not departed from. Actually, as shown later, there 
are so many factors that cannot be anticipated, 
that even such a scheme must be almost constantly 
"revalued" in order to assure its solvency. 

Under this method the interest accumulation 
goes a long way towards meeting the final pen- 
sion obligation. It could be argued that the use 
of the funds by the company would more than 
offset this difference. But as a practical matter 
the argument in the case of a pension system is 
in favor of the reserve method, even from the em- 
ployer's standpoint. From the employee's side the 
advantage is altogether in favor of the reserve 
method, with the pension funds kept entirely 
separate from those of the company. Otherwise 
the prospect of a pension long looked forward to 
may suddenly be swept away by some acute busi- 
ness depression or other unforeseen contingency. 

In the case of a system of paid-up annuities, 
the worker has complete protection in respect to 
benefits already earned by previous service. Even 
with an annuity system, however, it may be de- 
sirable to set aside or build up a fund which will 
yield an income sufficient to meet the yearly cost 
of annuities. 

While the actuarial method of accumulating a 
fund is extensively used in public service pension 



COST OF PENSION SYSTEMS 149 

systems, it is too seldom employed in private 
pension plans. The result is a very rapid increase 
in the expenditure for pensions which often, and, 
indeed, usually necessitates increased appropria- 
tions, or forces a radical reorganization of the plan. 

Outside of the amount of the benefit and the 
years of service or the retirement age stipulated, 
the cost of a pension system by any given method 
of financing ordinarily will be influenced chiefly by 
the fact whether or not the plan includes with- 
drawal equities and death benefits. Obviously, 
a system which does not provide for a withdrawal 
equity to employees separated from the service 
prior to the retirement age, or which does not 
provide a death benefit, will cost less and, indeed, 
very much less, than a system otherwise similar 
but under which such benefits are included. 

In discussing this feature there frequently has 
been a tendency to compare the costs of non- 
contributory with those of contributory systems. 
It should be emphasized, therefore, that the mere 
question whether the entire cost is borne by the 
employer, or is shared between him and his em- 
ployees, cannot, if all other conditions are the 
same, affect the actual cost. The question, who 
pays, is a detail which, while important, does not 
enter into the actuarial problem except in so far 
as it may influence the character of the benefits 



150 INDUSTRIAL PENSION SYSTEMS 

provided, or the number and class of employees 
included. The confusion on this point probably 
has arisen because it happens that non-contribu- 
tory systems usually exclude withdrawal equities 
and frequently exclude death benefits, whereas a 
contributory system ordinarily includes both. 
This is entirely natural, since, under a contribu- 
tory system, employees will almost certainly insist 
upon the right to withdraw their contributions in 
the event of separation from service, and, more- 
over, will be disposed to demand death benefits 
and other benefits which they might not be in a 
position to demand under a non-contributory 
system. 

Systems without Withdrawal or Death Benefits 

As a rough approximation it may be said that 
a pension system for industrial wage-earners, pro- 
viding a modest retirement benefit — but with no 
withdrawal or death benefit — will require an 
annual contribution of at least two to two and a 
half per cent of the total payroll at normal rates 
of wages, in the case of a representative manufac- 
turing corporation of substantial size. It should 
be emphasized that this cannot be laid down as a 
specific formula, since conditions peculiar to a 
given establishment or to a given industry may 
be such as to require a much larger amount. On 



COST OF PENSION SYSTEMS 151 

the other hand, it may be that for some establish- 
ments a contribution of slightly less than two per 
cent would suffice, say, for instance, in the case 
of a concern having an unusually large proportion 
of women workers, few of whom would ever go 
on the pension roll. It would seldom happen, 
however, that a pension system providing only a 
modest retirement benefit can be maintained on a 
much smaller annual contribution than two per 
cent of the total payroll. On such a basis, more- 
over, it ordinarily would be necessary to make 
special provision to cover the cost of meeting 
accrued liabilities. 1 

It is true that several industrial establishments 
with pension systems in force have found that the 
outlay during the brief periods that these have 
been in operation has been considerably less than 
two per cent and, indeed, even less than one per 
cent of the total payroll. But it is not reasonable 
to expect that costs can permanently be held 
down to such a ratio if the plan is really effective. 
All well-informed students of the pension problem 
are agreed that such a small percentage of the 
payroll will not suffice to provide pension pay- 
ments over a long period of years, even under a 
plan which includes no withdrawal or death 
benefit, and under which the retirement benefit 

*See p. 172. 



152 INDUSTRIAL PENSION SYSTEMS 

itself is of modest size. Moreover, a contribution 
of two per cent ordinarily cannot be expected to 
provide pensions for "back service" of the existing 
force. The cost of pensions for such back serv- 
ice, constituting what is technically known as 
the "accrued liability,'' would have to be met 
either by special appropriation, or by increasing 
the annual rate of contribution over a period of 
years. For instance, if a contribution of. say. two 
per cent were required to meet the future pen- 
sion liabilities, the fund might speedily become 
bankrupt if it immediately had to meet pensions 
for those workers already at, or near, the retire- 
ment age. In some cases, such a contribution 
might cover part of the cost of "accrued liabili- 
ties." ■ 

Subject to these, and various other, qualifica- 
tions the statement may be ventured that many 
industrial establishments of substantial size and 
normal labor turnover could hope to finance a pen- 
sion system of this limited sort on an annual con- 
tribution of two to two and a half per cent of the 
payroll. In many cases, however, unforeseen 
contingencies will compel supplemental contribu- 
tions to the fund in order to maintain its solvency. 

A representative of an engineering organization 
which has instituted several pension systems has 

1 For a further discussion of this point, see pp. 173. 174. 



COST OF PENSION SYSTEMS 153 

said: "Rarely is it feasible for a corporation to 
appropriate in advance a sum sufficient for all pen- 
sion needs." * 

Systems Providing for Withdrawal and Death 
Benefits 

As just explained, a pension system providing 
for withdrawal equities to those members of the 
force who are separated from the service before 
reaching the retirement age, or death benefits for 
those who die before reaching that age, must 
necessarily cost more than a plan otherwise simi- 
lar, but under which no such benefits are provided. 
Such withdrawal equities and death benefits tend, 
of course, to interfere with the building up of the 
pension fund under the operation of the compound 
interest principle. 

Broadly speaking, it may be assumed that, for 
a given establishment, a pension system providing 
the same retirement benefit as could be secured 
by a contribution of two per cent of the payroll 
where no other benefits were promised, but which, 
in addition, provided for withdrawal, disability, 
and death payments, will require a total contribu- 
tion of at least five to six per cent of the payroll, 
probably more. 2 

1 Elmer B. Tolsted. Cotton, November, 1920, p. 7. 

2 In the case of public service pensions of this type, the cost 
frequently is greater than six per cent of the payroll, and not 



154 INDUSTRIAL PENSION SYSTEMS 

Since the ordinary contributory pension plan 
dQes provide these benefits, such an estimate may 
be regarded as roughly applicable to a pension 
system of this type. But, as already pointed out, 
it should be kept in mind that the question 
whether the system is contributory or non-con- 
tributory is not the governing consideration. Such 
a cost ratio would be equally applicable to a non- 
contributory system which provided the same 
schedule of benefits. 

Again, it should be emphasized that this is noth- 
ing more than a rule of thumb, and cannot be 
taken as a working formula until verified by 
actuarial calculations based on the experience of 
the individual establishment. 

It also should be repeated that these estimates 
may easily be upset by special circumstances. For 
instance, the inclusion of highly paid executives at 
liberal rates of benefit might very seriously in- 
crease the cost of the plan. 1 

infrequently greater than ten per cent. Oftentimes, however, 
such systems provide for substantial benefits to widows or 
dependent children, which add greatly to the cost. 

If the death benefit is limited merely to the return of the 
employees' contributions, the cost might be less than five or 
six per cent. 

*An instance is cited of a company where a considerable 
number of such executives went on the pension roll at one 
time, with the result that the "curve" of the pension load was 
thrown radically out of its calculated course. In this case it 
happened that nearly all of these executives died within a 
single year, with the result that the curve was speedily brought 



COST OF PENSION SYSTEMS 155 

In practically all cases it is necessary to revise 
original estimates at frequent intervals, in order 
to guard against such departure from them as 
might eventually involve the scheme in bank- 
ruptcy. Failure to take this precaution has been 
responsible for the collapse of many pension funds 
or schemes which at their inception apparently 
were sound. Indeed, it is hardly too much to say 
that bankruptcy, either actual or constructive, has 
been the common fate of pension plans. This has 
been especially true in public service. Most of 
the systems now in effect in private industry have 
been in operation for too short a period to test 
their soundness, but, as stated in an earlier chap- 
ter, the financial stability of many of them is ex- 
ceedingly doubtful. 

Even with frequent revision of estimates, there 
is danger that unforeseen events will upset calcu- 
lations, and that supplemental contributions will 
be required unless the benefits are modified. It 
has been remarked that no gratuitous circum- 
stance comes to the relief of a pension scheme. 
The accidents and contingencies almost invariably 
operate against the plan from a financial stand- 
point. 

back to its normal. If, however, these executives had lived 
to an unusual age, the plan might easily have been perma- 
nently embarrassed. 



156 INDUSTRIAL PENSION SYSTEMS 

Long-Continued Increase in Pension 
Disbursements 

Mention has been made of the almost invariable 
tendency of pension disbursements under any 
formal plan to increase, and to increase for a long 
period of time. 

The public generally is familiar with this prin- 
ciple as illustrated by the pensioning of veterans 
of the Civil War, under which the disbursements 
continued to increase heavily long after succes- 
sively predicted "peaks" had been reached. This 
experience is largely the reflection of a funda- 
mental actuarial principle, which also holds in the 
case of private industrial pension systems. 

This tendency is well illustrated by Chart 1 giv- 
ing estimates of future pension disbursements 
under three plans, as prepared in the office of an 
organization which has installed several pension 
systems. These curves may be regarded as more 
or less typical of the normal course of pension dis- 
bursements for a large establishment. 

It will be noted that all of the curves in this 
chart show a fairly rapid and continuous rise over 
a period varying from forty to sixty years. In 
only one of the three curves shown is the peak of 
the load reached earlier than fifty years. 

One reason why expenditures thus increase is 



COST OF PENSION SYSTEMS 157 

that new pensioners are steadily being added be- 
fore those originally pensioned die. Thus the 
average expectancy of life for males at age sixty 

Chaet 1. Curves Showing Estimated Course of Pension 
Expenditures Over a Long Period of Years Under Three 
Different Plans. 

(Prepared by Independence Bureau, Philadelphia, Pa.) 
Published in Cotton, November, 1920. 



'30.000 
110,000 

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is about fourteen years. If ten persons in a given 
force are retired each year at age sixty, the pen- 
sion roll might increase to one hundred and forty 



158 INDUSTRIAL PENSION SYSTEMS 

before new additions were offset by deaths. This, 
however, might require a period of much more 
than fourteen years. In the meantime workers of 
younger age at the time the plan was started 
would begin to come on the rolls in increasing 
numbers. 

The principle involved is illustrated in Chart 2 
prepared by an expert for the Massachusetts Com- 
mission on Pensions. This chart also clearly 
brings out the fact that while the provision for 
present workers is a more immediate problem, it 
is far less important from the standpoint of ulti- 
mate cost than the provision for new entrants into 
the service. 1 

Actual Experience under Private Pension Plans 

Experience of Baltimore &, Ohio Raiload Com- 
pany. It is interesting to compare these typical 
curves with actual experience under one of the 
oldest pension plans in the United States, that of 
the Baltimore & Ohio Railroad Company. This 
plan was established in 1884, on a non-contribu- 
tory basis, to succeed a Relief Association which 
had been established a few years earlier. At the 
time that the pension plan was inaugurated there 
was turned over to it by the Relief Association 

Report of Massachusetts Commission on Pensions, 1914, 
p. 59. 



COST OF PENSION SYSTEMS 



159 




160 INDUSTRIAL PENSION SYSTEMS 

the sum of $86,000, and the Railroad Company- 
agreed to contribute 825,000 annually, together 
with an additional sum of $6,000 representing in- 
terest accruing on a $100,000 endowment of the 
Relief Association (provided that this sum was 
not required for other purposes). Assuming that 
there was no drain on this endowment, the Rail- 
road's total contribution to the plan would there- 
fore have been $31,000 per year. As a matter of 
fact, this was the actual contribution for several 
years. 

For the first eight years of the operation of the 
plan the appropriation by the company was more 
than sufficient to meet the payments to pen- 
sioners, but during the next five years the pay- 
ments ran heavily in excess of the railroad's 
contribution which, in 1901, was increased to 
875,000 and, in 1905, to $82,550. In a very few 
years, however, the pension disbursements heavily- 
exceeded this increased contribution and, by 1913, 
the latter was increased to $146,000; again, in 
1914, to $234,000; and still again, in 1915, to 
$266,000. The rapid increase in payments and in 
the amount required from the company are shown 
in the accompanying table. 1 

*It may be noted that the amounts appropriated by the 
company were supplemented by some other miscellaneous re- 
ceipts from subsidiary companies and from other sources. A 
statement of these is not essential to the comparison. 



COST OF PENSION SYSTEMS 



161 



Doubtless the exceptionally rapid increase in 
disbursements in recent years is partly due to the 
fact that the company's force had been steadily 

Table 2. Payments to pensioners and amounts appropriated 
by the company under Baltimore and Ohio Railroad Com- 
pany's non-contributory pension plan 1885-1915. 



Fiscal Year Ended 



it 


tt 
a 
tt 
it 
tt 
tt 

30 

tt 

tt 
n 
tt 
tt 
a 
tt 
tt 
tt 
tt 
it 
tt 
a 
tt 
tt 
a 
tt 
a 
n 
ft 
« 
tt 
tt 


1886 


« 


1887 


it 


1888 


(( 


1889 


a 


1890 


<< 


1891 


June 


1892 


tt 


1893 


it 


1894 


tt 


1895 


it 


1896 


tt 


1897 


u 


1898 


tt 


1899 


tt 


1900 


tt 


1901 


a 


1902 


tt 


1903 


u 


1904 


it 


1905 


it 


1906 


u 


1907 


tt 


1908 


it 


1909 


a 


1910 


tt 


1911 


tt 


1912 


a 


1913 


a 


1914 


it 


1915 



Payments to 
Pensioners 


Amount 
appropriated 
by Company 


$ 7,354 


$31,000 


18,125 


31,000 


20,669 


31,000 


23,438 


31,000 


24,160 


28,000 


25,100 


30,500 


27,894 


31,000 


22,381 


24,750 


31,954 


29,500 


34,457 


31,000 


34,800 


31,000 


34,726 


37,000 


46,346 


31,000 


50,242 


31,000 


52,117 


31,000 


49,026 


31,000 


55,830 


75,000 


63,143 


75,000 


64,730 


75,000 


67,199 


75,000 


73,322 


82,550 


82,972 


82,550 


95,310 


82,550 


112,356 


82,550 


129,247 


82,550 


157,273 


82,550 


174,746 


82,550 


193,908 


82,550 


212,645 


146,000 


234,292 


234,292 


266,538 


266,538 



Note: This table and the data given in the text are taken from 
a study made for the Carnegie Foundation by Professor G. E. Bar- 
nett of Johns Hopkins University. Thirteenth Annual Report of 
the Carnegie Foundation for the Advancement of Teaching, pp. 
110-113- vy 



162 INDUSTRIAL PENSION SYSTEMS 

increased, so that pensions in 1915 were being 
paid to some workers who were not in the com- 
pany's employ when the plan was started. 

Under the terms of the pension plan the bene- 
fits were limited to members of the Relief Asso- 
ciation. The number of pensioners at the end of 
a twenty-five-year period constituted a steadily 
increasing proportion of the membership of the 
Relief Association twenty-five years earlier. This 
is indicated by the following table: 1 

Table 3. Ratio of pensioners to membership in Relief Asso- 
ciation twenty-five years earlier under Baltimore and Ohio 
Railroad Company's pension plan 1883-1891. 





Membership 


Pensioners 
25 Years Thereafter 


Percentage 

of 
Membership 


1883 


15,989 


(1908) 511 


3.2 


1884 


16,848 


(1909) 586 


3.5 


1885 


17,002 


(1910) 667 


3.9 


1886 


18,297 


(1911) 708 


3.9 


1887 


21,226 


(1912) 787 


3.7 


1888 


21,211 


(1913) 862 


4.1 


1889 


20,081 


(1914) 923 


4.6 


1890 


21,722 


(1915) 1,036 


4.7 


1891 


21,587 


(1916) 1,062 


4.9 



This experience of the Baltimore & Ohio Rail- 
road Company with its pension plan, therefore, 
fully bears out the actuarial principle that under 
a formal pension system disbursements continue 
to increase over a long period of years. 

The marked increase in disbursements recorded 

1 See footnote, Table 2. 



COST OF PENSION SYSTEMS 163 

under the Baltimore & Ohio plan has not as yet 
been fully duplicated in private pension systems 
in industrial establishments in the United States. 
One reason for this is that such systems in indus- 
trial establishments have in most cases been in 
effect only a few years. There can be little doubt 
that they will reflect the same actuarial principle 
of rising expenditures over long periods, unless 
this is interfered with by arbitrary modifications 
of the plans. 

However, while in the case of industrial estab- 
lishments there is no such extended experience, 
the pension expenditures of several of these have 
already shown the traditional tendency to increase 
at a rapid rate. 

Experience of American Sugar Refining Com- 
pany. A striking illustration of this is found in 
the case of the American Sugar Refining Com- 
pany, as the following record of its pension dis- 
bursements shows: 

Tabi^ 4. Pension disbursements of American Sugar Refining 
Company, 1912-1920. 

1912 (9% months) $15,783.33 

1913 37,030.99 

1914 45,030.03 

1915 55,266.63 

1916 83,897.41 

1917 96,425.24 

1918 109,910.64 

1919 120,780.43 

1920 113,273.39 



164 INDUSTRIAL PENSION SYSTEMS 

The plan of this company was inaugurated in 
1912 on a non-contributory basis, and provides for 
a pension equivalent to one per cent of the average 
wage or salary during the ten years preceding re- 
tirement, multiplied by the years of service. The 
maximum benefit for any individual is $5,000 a 
year, and the minimum, after a service of twenty- 
five years, $20 a month. In several respects the 
plan is liberal. Of 326 pensioners on the roll at 
the close of 1920, 1 

4 received a yearly pension of $3,000 to $5,000 

5 

5 

17 

12 

259 

24 

The decline in the total outlay in 1920 was due 
to special causes. There is every reason to assume 
that the "peak" of the pension load is many years 
distant. 2 

Experience of Otis Elevator Company. The 
pension disbursements of the Otis Elevator Com- 
pany for the period 1913-1920 are given on the 
following page : 

While these disbursements do not show a regu- 
lar graduation with respect to increase, they 

1 The average number of persons employed by the company 
in 1919 was 9,464; in 1920 it was 9,286. 

2 In 1921, the pension disbursements were almost $135,000. 



1,500 " 


3,000 


1,000 " 


1,500 


500 " 


900 


400 " 


500 


200 " 


400 


up " 


200 



COST OF PENSION SYSTEMS 165 

nevertheless reflect the actuarial principle that 
disbursements tend to increase rapidly. It may 
be noted that the increase in 1919 and 1920 was 
in part due to a voluntary increase in the amount 
of current pensions, intended to take account of 
the marked increase in cost of living. 

Table 5. Pension disbursements of Otis Elevator Company, 
1913-1920. 

Amount paid 
Year for pensions 

1913 $12,073.02 

1914 15,724.97 

1915 24,286.44 

1916 24,625.36 

1917 25,490.43 

1918 27,934.33 

1919 35,006.96 

1920 41,714.19 

Of 136 pensioners who went on the pension roll 
during this eight-year period, fifty-five, or about 
forty per cent, died. This, of course, had a ten- 
dency to keep down the pension expenditure. In! 
all, one hundred and thirty-one death benefits 
were granted during this eight-year period, in- 
volving a total expenditure of $75,223.47. This 
sum is approximately thirty-seven per cent of the 
amount spent for pensions proper. The average 
monthly per capita payment for pensions in 1920 
was $43.49, and the average for prior years, $38.04. 

Experience of the United States Steel Corpora- 
tion. Special mention may be made of the ex- 



166 INDUSTRIAL PENSION SYSTEMS 



perience under the pension system of the United 
States Steel Corporation. This plan is of the non- 
contributory type, providing pensions amounting 
to one per cent of the average monthly pay re- 
ceived during the final ten years of service, with 
a minimum of $12 per month and a maximum of 
$100 per month. 

The annual expenditures for pensions under 
this plan from its inauguration in 1911, to 1920, 
are shown in the following table, the number of 
"active" cases on the pension roll at the close of 
each calendar year also being given. 

Table 6. Pension disbursements and number of active cases 
on the pension roll under United States Steel Corpora- 
tion's pension plan, 1911-1920. 



Year 


Active 

Cases 

Dec. 31 


Disbursements 


1911 


1,606 
1,843 
2,092 
2,521 
3,002 
3,013 
2,933 
2,861 
2,940 
2,969 


$281,457.37 


1912 


358,780.92 


1913 


422,815.14 


1914 


511,967.90 


1915 * 


659,389.42 


1916 


711,130.33 


1917 


712,506.65 


1918 


709,059.82 


1919 


733,707.45 


1920 


779,766.60 







1 Plan radically changed in this year. See text. 

The average age, average length of service, and 
average monthly pensions paid under the United 
States Steel Corporation's plan have been as 
follows: 



COST OF PENSION SYSTEMS 



167 



Table 7. Average age, average service, and average pension 
under the United States Steel Corporation's pension plan, 
1911-1920. 





ALL CASES 




Age 


Years of 
Service 


Pension 


1911 


66.66 
63.69 
63.73 
63.33 
62.84 
62.10 
62.04 
62.91 
63.67 
64.14 
63.68 


30.40 
29.14 
28.82 
28.76 
28.34 
28.41 
27.71 
29.42 
29.04 
29.53 
28.99 


$20.75 


1912 


20.30 


1913 


20.85 


1914 


20.40 


1915 


20.85 


1916 


23.15 


1917 


21.90 


1918 


24.85 


1919 


25.75 


1920 


30.90 


General averages 


22.30 



It will be noted that the total disbursements 
rose sharply from 1911 to 1916. Doubtless they 
would have continued to rise had not the Steel 
Corporation made a radical change in the terms 
of its plan in 1915, as a result of which the op- 
tional retirement age was advanced from sixty 
to sixty-five years, and the required period of 
service from twenty to twenty-five years. As the 
Report of the Pension Fund for 1916 stated: 
"The changes in the rules had the effect of greatly 
reducing the number of applicants for pensions 
on account of compulsory retirement and of re- 
tirement at request." 1 

The fact that in the case of this great system 

1 The effect of these changes in the plan is strikingly brought 



168 INDUSTRIAL PENSION SYSTEMS 

the curve of disbursements has not followed the 
traditional actuarial line is, therefore, due to 
special circumstances. Even with the radical 
change in the plan, the disbursements have 
already shown a tendency to resume the conven- 
tional upward trend. Thus, after remaining prac- 
tically stationary from 1916 to 1918, they rose 
considerably in 1919, and still more in 1920. 
There can be little doubt that the increase will 
continue unless a further change is made in the 
rules. 1 

This change in the rules is a striking illustra- 
tion of the tendency to amend pension systems, to 

out by the following table showing the numbers of employees 
retired in each year by the method given. 

Table 8. Classification of pension cases under United States 
Steel Corporation's pension plan, 1911-1920. 



Year 


Compulsory 
Retirement 


Retirement 
at Request 
of Employee 


Retirement 
at Request 
of Employ- 
ing Officer 


1911 


178 
45 
54 
74 
60 
37 
21 
27 
44 
57 


298 

257 

259 

360 

467 

63 

39 

38 

57 

64 


49 


1912 


27 


1913 


37 


1914 


75 


1915 


48 


1916 


5 


1917 


3 


1918 


10 


1919 


11 


1920 


10 



*In 1921, the pension disbursements of the Corporation ex- 
ceeded $947,000. 



COST OF PENSION SYSTEMS 169 

which attention has already been called in this 
discussion. Without necessarily condemning such 
a change, it is obvious that its effect must have 
been to deny to a considerable number of workers 
the realization of a pension to which they had 
looked forward. 1 While necessity may at times 
not only justify, but compel, rearrangement of 
pension plans, it is obvious that it is highly de- 
sirable to avoid such change by carefully can- 
vassing the probable burden at the outset and 
drawing up the plan accordingly. 

It is proper to point out that the pension dis- 
bursements of the United States Steel Corpora- 
tion, while large, represent only a trifling fraction 
of one per cent of the payroll, which ranged 
from $161,400,000 in 1911 to $479,500,000 in 1919. 
In long established public service pension sys- 
tems, the pension disbursements sometimes exceed 
twenty, or even thirty, per cent of the amount of 

*It may be noted, in this connection, that the plan of the 
United States Steel Corporation contains the following provi- 
sion : 

"Whenever it may be found that the basis named for pen- 
sions shall create total demands in excess of the annual income 
increased by any surplus deemed applicable by the Board of 
Directors, a new basis may be adopted reducing the pensions 
theretofore or thereafter granted, so as to bring the total ex- 
penditures within the limitations fixed by the Board of Direc- 
tors. Notice of such new basis shall be given before the begin- 
ning of the year in which it may be decided to put the same 
into effect." 



170 INDUSTRIAL PENSION SYSTEMS 

the payroll. Such a ratio would, of course, be 
prohibitive for an ordinary industrial establish- 
ment. The ratio in the case of the Steel Cor- 
poration, however, is extremely low. 

This experience of the Steel Corporation's pen- 
sion plan also strikingly illustrates the point made 
earlier in this report that the ordinary "discre- 
tionary" pension system goes only a small way 
towards solving the superannuation problem 
among a given group of industrial workers. The 
number of pensioners on the roll during the past 
six years — roughly, 3,000 on the average — is only 
about one and a quarter per cent of the average 
total number of employees on the payroll of the 
Corporation's constituent companies during this 
period. It is apparent, therefore, that of the 
great army of workers of the United States Steel 
Corporation only a trifling percentage enjoy a 
pension benefit. While the pension system of the 
Corporation has been in existence only since 1911, 
many of the largest plants of its subsidiary com- 
panies had been operating for long periods of 
years, so that the number of workers approaching 
superannuation must have been fairly large at 
the time the plan was inaugurated. The per- 
centage of pensioners in the case of the United 
States Steel Corporation is not radically different 
from the proportion in the case of several other 



COST OF PENSION SYSTEMS 171 

exceptionally large industrial concerns having 
pension plans. 

So small a percentage of pensioners to em- 
ployees indicates clearly that while such pension 
systems may accomplish a measure of benefit, 
even collectively they make only a pitiable ap- 
proach toward solving the problem of superan- 
nuation among industrial workers. If such 
provision against superannuation is to be re- 
garded as one of the main reasons for establishing 
industrial pension systems, it would seem that 
Industry may reasonably be required to show 
much more substantial results. 

It is unnecessary to present further evidence of 
the well-established fact that under normal con- 
ditions and in the absence of a change in the pro- 
visions of the plan, disbursements under a pension 
system increase at a rapid rate over a long period 
of years. Because of this fact, it is extremely 
important that a company establishing a pension 
scheme estimate as carefully as possible the prob- 
able ultimate load. While pension systems often 
are established because the employer feels the 
pressing need of making provision for employees 
already at the retirement age, the real problem 
of a pension system is not to meet these immedi- 
ate conditions but, instead, to make provision for 
the distant future. 



172 INDUSTRIAL PENSION SYSTEMS 

Cost of Meeting "Accrued Liabilities" 

A vitally important element in the cost of a 
pension or annuity system is the heavy outlay 
necessary to provide pensions for the back service 
of employees who have already completed con- 
siderable periods of service, some of whom will 
almost immediately go upon the pension roll. 
This problem of meeting the "accrued liabilities," 
as it is technically called, is one clearly under- 
stood by actuaries, but too often overlooked by 
employers about to inaugurate a retirement sys- 
tem. As one writer has said: ''Every plan for 
maintaining a pension system has sooner or later 
encountered the difficulties of the 'accrued liabili- 
ties/ and upon this rock most pension systems 
have foundered." * 

In this connection, the Special Committee of 
the Merchants' Association of New York well 
said: 2 

"One of the fundamental problems is so essen- 
tial that it is entitled to especial emphasis. This 
is the problem termed that of the 'accrued liabili- 
ties.' These are the liabilities with which a pen- 
sion system starts owing to the previous service 
of employees when there was no pension system. 

Carnegie Foundation for the Advancement of Teaching, 
Bulletin No. 9, pp. 41-42. 

2 For further discussion of this point see various reports of 
the Carnegie Foundation for the Advancement of Teaching. 



COST OF PENSION SYSTEMS 173 

It is always a heavy cost. It must always be met 
somehow. The handling of it properly requires 
skillful and scientific management, actuarial 
knowledge, and pension experience. The direc- 
tors of a corporation can feel certain that a pro- 
posed pension plan is amateurish, and therefore 
inadequate, unless this problem is exhibited in the 
clearest light and a satisfactory solution offered. 
No lucky event ever comes to the rescue of a 
pension system. Unless it starts right, by careful 
thought beforehand, it is doomed. The 'accrued 
liabilities' are of the essence of this forethought." 

Obviously, if the contributions made to a pen- 
sion fund were immediately absorbed in paying 
pensions to workers already grown old in the 
service, there would be no accumulation of funds 
to meet future pensions for the younger members 
of the force, or for future entrants on the force. 
It is, therefore, almost invariably necessary to 
make some special provision for meeting these 
"accrued liabilities." This can be done in a 
variety of ways. One of the simplest methods of 
meeting this charge in the case of an establish- 
ment with ample resources is to set aside a fund 
sufficient to provide pensions for all back service 
rendered at the time the plan is inaugurated. 
This permits the annual contributions under the 
plan to accumulate against the needs of future 
years. Few establishments, however, could afford 
to set aside such a fund. 



174 INDUSTRIAL PENSION SYSTEMS 

Another method of meeting the "accrued liabili- 
ties" is to increase the annual contribution pro- 
vided for under the plan for a period of years, 
using the excess over the contribution determined 
upon as necessary to meet pensions of future 
years to provide pensions for back service. For 
instance, if it were decided that an annual con- 
tribution of three per cent of the payroll would 
be sufficient to provide for future service, then for 
a period of years the annual contribution might 
be fixed at, say, six per cent, using the additional 
three per cent to meet the "accrued liabilities." 

The cost of meeting these "accrued liabilities" 
is relatively heavy, since many workers in this 
group will have put in fairly long periods of 
service against which no contribution has been 
made. As an illustration of the burden of this 
item, it may be noted that the Report of the 
Special Committee of the King Edward's Hospital 
Fund cited estimates of actuaries to the effect that 
in the hospital services then under discussion, 
composed mainly of salaried workers, the cost of 
meeting the "accrued liabilities" would amount to 
approximately a full year's payroll. 

Another writer on the pension problem has 
estimated the cost of meeting the "accrued lia- 
bilities" under a public service system financed on 



COST OF PENSION SYSTEMS 175 

the reserve basis at more than one year's total 
payroll. 1 

The cost may be substantially less in the case of 
an ordinary industrial establishment. An esti- 
mate by an actuary of a large life insurance com- 
pany for such an establishment, with a low labor 
turnover, placed the cost of meeting the "accrued 
liabilities" in that particular instance at sixty- 
nine per cent of one year's total payroll. 2 This 
estimate was of a somewhat hypothetical charac- 
ter and cannot be regarded as typical. It may 
exceed the percentage necessary in the case of a 
concern with a high labor turnover. Much de- 
pends, of course, on the nature of the benefits 
included in the plan. 

Heavy though the cost may be, the problem of 
the "accrued liabilities" is one which no employer 
about to institute a retirement system can afford 
to disregard. While it might seem at first sight 
that the employer could take the ground that a 
pension system need not be retroactive, it has 
been demonstrated beyond a doubt by experience 
that an employer who sets up a pension system for 
younger workers or future entrants, will, as a 

*Paul Studensky. "Broadening the Scope of Pensions in 
Private Industry," New Jersey, Vol. VI, No. 8. 

a "Pensions for Employees." E. E. Cammack, Associate 
Actuary, ^Etna Life Insurance Co. 



176 INDUSTRIAL PENSION SYSTEMS 

practical matter, have to take care of those 
workers who have already grown gray in his 
service. This is so universally the judgment of 
authorities on the pension problem that it is 
hardly open to debate. 

It is worth repeating, as noted in an earlier 
chapter, that a benefit for "back service" cannot 
be claimed by the worker under the principle of 
deferred pay, but is rather a matter of practical 
expediency. On this point one critic has well 
said: * 

"The standing of these employees as respects 
their past service is entirely different from the 
standing of employees who have been included 
in the scheme from the commencement of their 
employment. The holding out of a pension 
benefit was not an inducement for these men to 
enter the employment or to remain in it. Hence, 
so far as past service is concerned, they may be 
considered to have received full remuneration for 
services rendered and any pension benefit which 
may be granted must be in the nature of a 
gratuity or special reward rather than of a de- 
ferred wage. But, in spite of the fact that no 
provision has been made for these men in the 
past, it will be generally desired by the employer 
to make supplementary grants." 

1 J. H. Woodward: Assistant Actuary, Equitable Life As- 
surance Society of U. S., "Industrial Retirement Systems based 
on the Money-Purchase Principle." Published in Economic 
World, December 3 and 10. 1G21. 



COST OF PENSION SYSTEMS 177 

Costs under an Informal Pension Policy 

Under an informal policy, particularly in the 
case of a comparatively small establishment, it is 
possible to exercise considerable control over the 
cost. Even here, however, costs will tend to in- 
crease, since new pensioners will be added to the 
roll for many years before all of the original 
entrants die. If an establishment fails to take 
account of this fact, its costs may speedily be- 
come a burden. An employer adopting an infor- 
mal policy should carefully canvass his force at 
the outset to determine the number of persons 
who should be pensioned at once, and should also' 
estimate as accurately as possible the probable 
number of new entrants for some years ahead, 
and adjust the maximum pension accordingly. 
In all cases, liberal allowance should be made for 
unforeseen contingencies, and it should be kept 
in mind that the scheme will have to be revised 
every few years and presumably on the basis of 
an increased expenditure. It will be found ad- 
visable to make a rough calculation of costs for, 
say, ten years ahead, and check this from year to 
year with the results of actual experience. 

For instance, assume that a company has ten 
workers whom it desires to pension at once, and 
that it may reasonably expect to add three more 



178 INDUSTRIAL PENSION SYSTEMS 

to the pension roll each year for, say, ten years, 
and that there will be no deaths among pensioners 
during this period. Assume, further, that while 
pensions will van' in individual cases, the aver- 
age amount will be $200, $300, or $400 respec- 
tively. The costs over a ten-year period, assum- 
ing that the estimates are not departed from, 
would run as follows: 



Table 9. Illustration of cumulative increase in pension out- 
lay under an informal pension policy on various assumed 
bases 



Starting with outlay of 

and 

annual pension of 


$2,000 
200 


$3,000 
300 


$4,000 
400 


First vear 


$2,600 
3.200 
3.800 
4.400 
5.000 
5.600 
6.200 
6300 
7.400 
8,000 


$3,900 

4,800 

5.700 

6.600 

7.500 

8.400 

9,300 

10200 

11.100 

12.000 


$5,200 


Second " 


6.400 
7600 


Third " 


Fourth ■ 


8.800 


Fifth " 


10 000 


Sixth " 


11200 


Seventh " 


12.400 


Eighth " 


13.600 


Ninth " 


14.800 


Tenth " 


16.000 






Total 

Average 


$53,000 
5,300 

$132,500 


$79,500 
7,950 

$198,750 


$106,000 
10.600 


Fund required at four 
per cent simple inter- 
est, to produce such 
an j'nrnmf* 


$265,000 







In all probability there would be a number of 
deaths among even this small number of pen- 
sioners during such a ten-year period. In the 



COST OF PENSION SYSTEMS 179 

early years of the scheme, moreover, there would 
be some interest accumulation — provided a fund 
were actually set aside. On the other hand, there 
might be an unexpected number of new pen- 
sioners. 

While such a calculation may be wide of the 
mark, it should nevertheless be of value in deter- 
mining for a short period ahead the amount of 
the average pension to be paid, and the number 
of new entrants that can be taken care of. In 
any event, such a calculation should be useful in 
showing an establishment some things that it can- 
not reasonably expect to do. For instance, if, 
in the case assumed, the management feels that 
the total pension outlay must not exceed $5,000 
a year over a ten-year period, it must keep the 
average pension down. If it finds that the num- 
ber of new entrants exceeds the estimated num- 
ber, it must reduce the amount of pension either 
in all cases or in a sufficient number of cases to 
keep the average at the amount originally deter- 
mined upon. In particular, it must avoid paying 
exceptionally large pensions to a few entrants as, 
for instance, executives who had been receiving 
large salaries. Otherwise, its scheme is bound to 
come to grief. In any case, as already empha- 
sized, the scheme will have to be revised at fre- 
quent intervals. 



180 INDUSTRIAL PENSION SYSTEMS 

Need of Actuarial Estimates in Establishment of 
a Pension System 

Practically all actuaries and pension experts are 
agreed that a pension system should be estab- 
lished only after expert actuarial analysis of the 
probable future costs. 

The importance of actuarial estimates was em- 
phasized by the Special Committee of the Mer- 
chants' Association of New York as follows: 

"The guidance necessary thus properly to es- 
tablish a pension system cannot be obtained in 
the corporation's own staff. The problem is not 
a mere accounting one ; it is of a far more complex 
and scientific order. The somewhat unfortunate 
experience in the United States in regard to pen- 
sions has been due to the superficial character of 
the investigation which has preceded the es- 
tablishment of most pension plans — the mere 
collection of the rules of a few previous plans 
framed after similar superficial consideration and 
selections from them arranged by persons unaware 
of the fundamental questions involved. Patent 
fallacies, once started in American pension plans, 
have thus endlessly perpetuated themselves." 

However, even with the best of actuarial ad- 
vice, forecasts of the ultimate pension burdens 
are involved in great uncertainty. Indeed, it is 
obvious that an estimate of future costs where 
these are subject not only to possible changes in 



COST OF PENSION SYSTEMS 181 

the character of the personnel, but in rates of 
wages, in longevity, and in stability of the labor 
force, can never be anything better than careful 
estimates. A particular weakness of many actu- 
arial estimates is that they are based on the 
assumption of a constant force, and a continuance 
of the existing rates of wages. Such assumptions 
obviously will not hold in the case of many com- 
panies. On the other hand, attempts to forecast 
the probable increase in the force or the future 
course of wages clearly must be highly arbitrary 
and consequently subject to a wide margin of 
error. 

For these reasons, as already shown, it is im- 
perative that the original forecasts be more or less 
constantly supplemented by new estimates, or 
"revaluations," as they are sometimes called, in 
order to prevent the curve of disbursements from 
departing so far from the calculated normal as 
to endanger the stability of the plan. It should 
be understood that these revaluations do not 
mean necessarily that the original normal can be 
maintained at the same expense. However, if 
departures from the normal trend of expenditures 
as originally calculated can be detected in time, 
it may be possible to correct them by only a small 
change in the annual contribution. If this is not 
done, one of two alternatives must eventually bej 



182 INDUSTRIAL PENSION SYSTEMS 

faced: either a heavy increase in the contribu- 
tions, by a lump sum, or otherwise; or else a cur- 
tailment of the benefits. Either alternative is, of 
course, highly disadvantageous. 

As a matter of fact, even where expert actuarial 
advice has been taken at the outset, and where 
plans have thus been revalued, unforeseen con- 
tingencies have more or less frequently arisen 
which have upset calculations and even jeopard- 
ized the financial stability of a pension scheme. 1 

With respect to the fallibility of actuarial esti- 
mates the following excerpt from a statement of 
George King, one of the leading actuaries of Great 
Britain, is of interest. 2 

"I agree that actuaries cannot possibly predict 
the future with strict accuracy. There are very 
many variable elements that have to be taken 
into account, and there must, therefore, be elas- 
ticity to keep the Fund solvent, and frequent 
actuarial valuations, so that any changes that 
take place may be dealt with in time, in order 
that there may be no necessity for very violent 

*A striking instance of repeated deficits in a large fund, 
despite fairly frequent actuarial examinations, is furnished by 
the experience of the British Railway Clearing System Super- 
annuation Fund, as given in the report of the Sub-Committee 
of the King Edward's Hospital Fund for London. ("Pensions 
for Hospital Officers and Staffs," pp. 77-81.) 

2 From testimony submitted to Lord Southwark's Committee 
on Railway Superannuation Funds. Published in "Pensions 
for Hospital Officers and Staffs." Report by a Sub-Committee 
of Executive Committee of King Edward's Hospital Fund 
for London, Appendix. 



COST OF PENSION SYSTEMS 183 

measures to put matters right. A very striking 
example, however, can be brought forward to 
show how even the most cautious forecasts of 
actuaries may fail to give stability and certainty 
to a Fund, and that where even extreme rigidity 
is instituted at the outset there may be fluctua- 
tions in the working of such a Fund. Here I 
would put in the valuation report of the Elemen- 
tary School Teachers' Deferred Annuity Fund. 
. . . These contributions are treated as single 
premiums to purchase deferred annuities, to com- 
mence at exact age sixty-five, and the contribu- 
tions are not returnable under any circumstances, 
the annuities remaining to the credit of the 
teachers, even if they withdraw from the service. 
Thus it appears that the only uncertain elements 
in these Funds are those of mortality and interest. 
A table of deferred annuities was prepared under 
the Act jointly by the late Mr. A. J. Finlaison 
and the late Mr. W. Sutton, both government 
actuaries, and they based their calculations on the 
Government Annuitants', 1883, experience, at a 
rate of interest which is not known, but which was 
very low, being less than two and a half per 
cent. . . . 

"It would have been thought that the basis 
adopted by these eminent actuaries was a thor- 
oughly safe one, and in fact there had been agita- 
tion among the teachers, who alleged that the 
annuities secured were too small, and that the 
Fund could afford more; that the rate of mor- 
tality amongst teachers was higher than amongst 
the government annuitants, and that, therefore, 
it was not fair to employ that table for the teach- 



184 INDUSTRIAL PENSION SYSTEMS 

ers. The Treasury did me the honor to entrust 
to me the first septennial valuation; the rate of 
mortality which had prevailed was investigated, 
and it was found that that rate was so low that 
the calculations of the actuaries were altogether 
stultified, and that there was a large deficiency 
in each of the Funds — that for the males and 
that for the females. 

"It thus appears that even in the case of a 
Fund so carefully prepared, and established on 
what at the outset had every appearance of ex- 
cessive safety, there may be great surprises, and 
that the best knowledge and skill may fail to 
forecast the future." 

This difficulty of forecasting the ultimate cost 
is a consideration which should be carefully 
weighed before introducing a formal pension sys- 
tem. Even in the case of a long established 
concern with a stable business and with ample 
resources, conditions may arise which will make 
the pension load a heavy burden. Indeed, in 
many cases this uncertainty as to cost may be a 
deciding factor against the introduction of a 
formal pension plan. 

In the case of an annuity system of the sort 
described in Chapter V, the actuarial uncertain- 
ties are largely eliminated so far as the employer 
is concerned. While it is reasonable to expect 
that the cost of such a system will gradually 
tend to increase, there should be nothing ap- 



COST OF PENSION SYSTEMS 185 

proaching the tremendous increase in expenditures 
which normally occurs under a pension plan. 

The fact that such an annuity system ordi- 
narily would be handled through an insurance 
company is objected to by some employers on 
the ground that they can finance the plan them- 
selves at less expense. This contention seems of 
a very doubtful validity. A large part of an in- 
surance company's charge is applied to the build- 
ing up of a reserve as required by law. Ordinarily 
an insurance company should be able to do the 
administrative work involved in an annuity sys- 
tem at less cost than an industrial employer 
whose force would be unfamiliar with details of 
insurance practice. A much more important con- 
sideration is that any one industrial establish- 
ment may encounter unexpected losses through 
accident, or otherwise, that would wreck the 
stability of its plan, whereas with an insurance 
company the losses of a single establishment or- 
dinarily would be insignificant when merged with 
its total risks. In any event, the responsibility 
would properly rest with the insurance company. 



CHAPTER VIII 

COST OF A CUMULATIVE ANNUITY SYSTEM 

The cost of a system of paid-up annuities of 
the sort described in Chapter V, while depending 
primarily upon the amount of the benefit and the 
general conditions imposed, will be influenced 
in a very marked degree by the rate of labor 
turnover. As previously explained, such a sys- 
tem ordinarily would not be applicable to work- 
ers who had not passed through the period of 
initial heavy labor turnover, or, in other words, 
workers who had not already served several 
years in the company's employ. Even in case of 
the "stabilized" portion of the working force, as 
it may be called, however, there is an appreciable 
labor turnover, gradually becoming less as the av- 
erage age of the workers, or their average length 
of service, increases. 

Where the rate of labor turnover for such sta- 
bilized portion of the working force is normal, the 
cost of a system of paid-up annuities such as has 
been described should not exceed the cost of a 

186 



COST OF ANNUITY SYSTEM 187 

pension system providing the same benefits. In- 
deed, as shown later, it may be less. 

Since the annuity policies become the property 
of the worker year by year, even though he should 
become separated from the service before reaching 
old age, the successive delivery of these policies 
virtually provides for a withdrawal equity or "re- 
turn of contributions," although this equity is, 
of course, on a deferred basis. Therefore, the cost 
of such an annuity system should more closely ap- 
proximate the cost of a pension system conferring 
such withdrawal equities than that of a pension 
system conferring a retirement benefit only. 

One thing may be said with reasonable cer- 
tainty, namely, that the cost of such a system of 
annuities can be estimated with far greater ac- 
curacy than the cost of a pension system. The 
maximum cost for the first year clearly would be 
the aggregate cost of purchasing an annuity for 
each member of the force who completed the re- 
quired period of service. Such a computation 
can be made with almost absolute accuracy for 
the first year, 1 since the. ages of the respective 
workers can be ascertained and the cost of the 
annuity policy at each age is fixed in the insur- 
ance contract. 

*That is, if made at the close of the year. If made in ad- 
vance, allowance would have to be made for probable deaths 
and withdrawals. 



188 INDUSTRIAL PENSION SYSTEMS 

The method of calculating the cost of such an 
annuity system, without provision for the "ac- 
crued liabilities/' is illustrated by the following 
table, based on an assumed age distribution of a 
group of male workers. The policy on which these 
rates are based provides no death or disability 
benefit. The annuity payments cease on the 
death of an annuitant. The cost might be slightly 
reduced by the return of a small portion of the 
premiums, or so-called dividends. 

If the cross section of the working force by 
ages and years of service remains constant, like- 
wise the rate of labor turnover, the cost of such 
a system in its first year, not including the ''ac- 
crued liabilities." would practically measure the 
cost in its twentieth year, or any other year. No 
such constancy of experience, however, can be as- 
sumed. The average age and the rate of turn- 
over may fluctuate, while the number of workers 
in any given age group may vary considerably 
from year to year. Moreover, the system itself 
may have a tendency to increase the length of ser- 
vice. In this case the cost would increase, since, 
as already shown, annuities purchased for workers 
of advanced ages cost much more than those for 
young workers. The annual outlay under such a 
:em should, however, increase much more 
slowly than the annual outlay under a pension 



COST OF ANNUITY SYSTEM 



189 



Table 10. Method of computing cost, for first year, of paid-up 
annuities for $10 each for a group of 500 male workers, 
all of whom have completed at least five years of service. 



Age 


Cost of one 


No. workers in 


Cost for 


$10 annuity 


each group 


each group 


25 


13.00 


7 


91.00 


26 


13.56 


8 


108.48 


27 


14.15 


8 


113.20 


28 


14.77 


12 


177.24 


29 


15.42 


11 


169.62 


30 


10.10 


17 


273.70 


31 


16.80 


12 


201.60 


32 


17.55 


10 


175.50 


33 


18.32 


18 


329.76 


34 


19.14 


19 


363.66 


35 


19.99 


18 


359.82 


36 


20.89 


14 


292.46 


37 


21.83 


18 


392.94 


38 


22.81 


17 


387.77 


39 


23.85 


19 


453.15 


40 


24.94 


16 


399.04 


41 


26.09 


20 


521.80 


42 


27.30 


17 


464.10 


43 


28.58 


13 


371.54 


44 


29.92 


17 


508.64 


45 


31.35 


15 


470.25 


46 


32.85 


16 


525.60 


47 


34.45 


14 


482.30 


48 


36.14 


14 


505.96 


49 


37.94 


12 


455.28 


50 


39.85 


13 


518.05 


51 


41.89 


17 


712.13 


52 


44.07 


11 


484.77 


53 


46.41 


11 


510.51 


54 


48.91 


14 


684.74 


55 


51.60 


10 


516.00 


56 


54.51 


6 


327.06 


57 


57.64 


8 


461.12 


58 


61.05 


7 


427.35 


59 


64.74 


8 


517.92 


60 


68.78 


5 


343.90 


61 


7350 


1 


7350 


62 


78.06 


9 


702.54 


63 


83.42 


8 


667.36 


64 


89.37 


4 


357.48 


65 


95.53 


6 


573.18 


Totals 


500 


$16,471.72 



190 INDUSTRIAL PENSION SYSTEMS 

system, where the immediate expenditure is 
smaller, but where the ultimate expenditure many 
years later often becomes vastly greater. As a 
matter of fact, the cost of an annuity plan may 
remain fairly constant over a long period of years. 

In brief, while under such a system of annuities 
the cost may tend to increase from year to year, 
it should be possible to estimate the maximum 
cost for several years ahead with reasonable ac- 
curacy. Moreover, if the cost increases more 
sharply than was anticipated, policies could be 
taken out for smaller amounts without wrecking 
the financial value of the scheme to the worker. 

The question arises whether the practice of 
paying up such annuities in full each year is not 
needlessly expensive, in view of the fact that a 
considerable number of policies will be purchased 
for workers who will become separated from the 
service long before reaching the retirement age. 
It has been argued by some that a much less ex- 
pensive method would be to take out an annuity 
policy for whatever amount it might be desired 
to pay on retirement at some given age — say age 
sixty-five — and distribute the cost evenly over 
a long period on a "flat rate" basis, letting the in- 
terest accumulations on the early payments 
largely provide the fund from which the annuity 



COST OF ANNUITY SYSTEM 191 

would ultimately be paid. This point has been 
made by various critics of the paid-up annuity 
plan. 

The apparent advantage of interest accumula- 
tion under such a "flat-rate" annuity is, however, 
offset by the fact that under the paid-up plan 
the first policies can be purchased at a cost not 
only much less than the cost of those purchased 
later in the series, but at much less than the aver- 
age or "flat-rate" cost of the entire series. There- 
fore, if both policies provide for a withdrawal 
equity, the cost to the company on the single 
premium basis would be less than the cost under 
a "flat-rate" system, because many policies issued 
to workers who withdraw will have been pur- 
chased at relatively low cost. 

In this connection, the following statement by 
an actuary of a large insurance company may be 
cited : 

"You ask as to the relative cost to the employer 
of a series of single premium paid-up deferred an- 
nuities as compared with the cost of a level 
premium deferred annuity. . . . Assume an em- 
ployee now age twenty-five for whom it is in- 
tended to provide a pension at sixty-five; also this 
pension is to be $20 per annum for each year of 
service. This could be purchased in two ways: 1 
(1) by means of a series of single premiums for 



192 INDUSTRIAL PENSION SYSTEMS 

paid-up deferred annuities of $20 each to be en- 
tered upon at age sixty-five; or (2) by means 
of a level annual premium for a deferred annuity 
of $800 to be entered upon at age sixty-five. 

"Under (1) the annual cost would commence at 
a small amount for a young employee and increase 
each year as the age increased. Under (2) the 
cost would be a level amount from year to year 
and would not increase. 

"If the employee is allowed under both systems 
the accrued value of the contract at the time of 
withdrawal, the cost under the second system will 
be materially greater because of the heavier rate 
of withdrawal at the earlier ages. 

"If no withdrawal benefits of any kind are al- 
lowed to the employee, the two systems are 
mathematically equivalent in their costs to the 
employer, the only difference being that under 
(2) the apparent cost would be less because the 
funds are paid in earlier and earn interest." 



Problem of "Accrued Liabilities" under an An- 
nuity System 

With an annuity system of the sort described in 
Chapter V the problem of meeting the "accrued 
liabilities" is forced sharply to the front at the 
outset, since the purchase of one $10 (or other 
small) annuity each year for those workers al- 
ready approaching the retirement age will not 
provide a substantial income at retirement. For 



COST OF ANNUITY SYSTEM 193 

example, a worker already fifty-seven who would 
retire at, say, age sixty-five, would have only 
eight annuity policies. If these were for $10 each 
the total benefit would be only $80 per year. 

It is a merit, rather than a defect, of the annuity 
system that provision for the "accrued liability" 
is thus brought into the foreground, since, as al- 
ready made clear, failure adequately to meet this 
problem has been responsible for the shipwreck 
or reorganization of more than one pension plan. 

There are various ways in which the "accrued 
liabilities" may be met under an annuity system. 
One very simple method — although possibly a 
needlessly expensive one — would be to purchase 
at once for such older workers one .additional an- 
nuity for each year of "back" service (beyond the 
initial "trial-period") already rendered at the time 
the plan was put into operation. For instance, 
taking the illustrative case just cited above, if 
a worker fifty-seven years of age at the time the 
annuity system was adopted had entered the em- 
ploy of the company at age twenty, he already 
would have completed thirty-seven years of ser- 
vice. If the "trial-period" under the plan was 
five years, he would have had thirty-two years 
of "back" service. If the company should pur- 
chase one annuity for each of these thirty-two 
years of "back" service and continue to purchase 



194 INDUSTRIAL PENSION SYSTEMS 

one annuity each year until he reached age sixty- 
five, he would have on retirement not eight, but 
forty, annuity policies. If each of these assured 
him an income of $10 for the rest of his life, he 
would have an annual income of $400. The cost 
of such policies to cover "back" service would, 
of course, be governed by the age of the worker 
at the time they were purchased, and the total' 
first cost would be very much greater than if they 
had been purchased year by year beginning at 
age twenty-five. 

Computations made by one establishment in- 
dicated that the cost of meeting the "accrued lia- 
bilities" in this way would be approximately ten 
times the cost the first year of buying one annuity 
for every worker on the payroll with over five 
years of service. Or, to use hypothetical figures, 
if the cost of purchasing one $10 annuity for every 
worker on the payroll with over five years of ser- 
vice were $50,000, then the cost of meeting the 
"back" annuities in this case would have been 
approximately $500,000. These ratios cannot be 
regarded as generally applicable, since the dis- 
tribution by ages, the proportion of men and 
women on the force, and the rates of labor turn- 
over, will very greatly affect the result. The il- 
lustration may, however, afford some idea of the 



COST OF ANNUITY SYSTEM 195 

relative cost of meeting the "accrued liability" in' 
this way. 

The "accrued liability" under an annuity sys- 
tem probably could be met at somewhat less ex- 
pense in the case of workers approaching the re- 
tirement age by deferring the purchase of ad- 
ditional annuities for back service until their re- 
tirement actually took place. While the imme- 
diate cost of annuities so deferred would be some- 
what greater at the higher age then attained, the 
real cost, for reasons already explained, would 
be about the same. If, in the meantime, any of 
these workers were to die — and, in the case of a 
large establishment, a number certainly would 
— leaving no dependents, the company could thus 
save the cost of such annuities for back service, 
at least in many cases. (If such workers left de- 
pendents, it is true that the company might feel 
disposed to do something for these.) Again, 
some of these older workers might voluntarily 
quit the company's service, and the management 
might justly take the ground that it was under 
no real obligation to make the plan retroactive in 
such cases, at least as a universal practice. 

In these and in other ways it is possible that 
the cost of meeting the "accrued liabilities" could 
be reduced from the amount required to purchase 



196 INDUSTRIAL PENSION SYSTEMS 

annuities representing every year of back service 
(beyond the stipulated "trial service period") im- 
mediately upon the adoption of the annuity plan. 

It might be argued that if such postponement 
of the purchase of annuities was wise in the case 
of present workers of advanced years, then the 
purchase of annuities should in all cases be de- 
ferred until retirement. This suggestion is en- 
tirely in conflict with the fundamental concept 
of the annuity system. A particular feature of 
the annuity system is its immediate appeal to 
the worker and its definite assurance that each 
year of faithful service will be rewarded at the 
time by an additional annuity policy. In this 
respect the annuity system, as already shown, is 
greatly superior to the ordinary pension system, 
where the worker has merely the promise, and 
at times a very uncertain promise, of a retirement 
benefit until he actually enters on the pension 
roll. It is largely because of this assurance that 
the annuity system may be expected to reduce 
labor turnover. 

Even the immediate purchase of annuities to 
represent back service in every case, however, ap- 
parently would be no more expensive than the 
provision for "accrued liabilities" under a pen- 
sion plan. Indeed, in view of the fact that many 
workers at the time an annuity system is estab- 



COST OF ANNUITY SYSTEM 197 

lished would have only a few years of "back" 
service to their credit, there is very strong ground 
for the opinion that the cost of meeting the "ac- 
crued liabilities" in this way would be substan- 
tially less than the cost of meeting them under 
a formal pension system. In comparing the costs 
under the two systems, however, it should be kept 
in mind that they do not aim to produce iden- 
tical results. The cumulative annuity system is 
essentially a "reward-of-service" system, and the 
total annuity at retirement is dependent on the 
number of annuity policies accumulated, rather 
than on the amount needed to support the worker 
in old age. It may be noted, moreover, that the 
"trial service" period contemplated in the case of 
a cumulative annuity system would affect such a 
comparison of costs. 

One practical consideration under such an an- 
nuity system is that workers joining the force at, 
say, age forty-five, and retiring at, say, age sixty- 
five, would not secure a large total income on the 
basis of a $10 annuity for each year of service in 
excess of five. Any tendency to depart from the 
plan and purchase more annuities for such work- 
ers will, of course, increase the cost. Yet there 
doubtless will be cases where the employer will 
feel disposed to do this. 

If such an annuity system were in general use 



198 INDUSTRIAL PENSION SYSTEMS 

in industry, this difficulty would largely be obvi- 
ated, since workers coming on the force at, say, 
age forty-five, presumably would already have 
earned several annuity policies by prior service 
elsewhere, so that the last employer need consider 
only the number of years of service actually ren- 
dered him. 1 In the case of chronic "floaters" the 
aggregate number of annuities earned might be 
negligible. The responsibility for this, however, 
could not fairly be placed on the employer. 

A very great advantage in providing for the 
"accrued liabilities" under the annuity system is 
that the cost can be definitely figured at the time. 
If the company is able to meet this cost at once, 
or to meet it during a brief period of, say, five or 
ten years, the plan has a very great attractiveness, 
as against leaving these "accrued liabilities" to 
interfere with the normal operation of the plan. 

From the standpoint of the "accrued liabilities," 
therefore, as in numerous other respects, the an- 
nuity system appears to have a decided advan- 
tage over the ordinary pension system. 

1 In the case of workers of advanced ages it might be prac- 
ticable to shorten the "trial period." 



CHAPTER IX 

BENEFITS TO BE INCLUDED IN A PENSION OR 
ANNUITY SYSTEM 

Once an industrial employer has decided to in- 
troduce a pension or annuity system, his first 
problem is to determine what benefits shall be 
provided. 

It should be emphasized that a pension in a 
strict sense is a retirement benefit, to be paid to 
workers no longer able to perform their tasks, or 
who have rendered a given measure of service. 
Death benefits, and even disability benefits where 
the disability occurs prior to superannuation, are 
insurance features quite distinct from a pension 
proper. A withdrawal equity is in the nature of 
a surrender value in an insurance policy. All 
these collateral features necessarily increase the 
cost of a retirement system. This, of course, does 
not necessarily condemn them, but their character 
should be understood. 

The following statement by a prominent Brit- 
ish actuary may be cited in this connection: 

199 



200 INDUSTRIAL PENSION SYSTEMS 

"Returns of contributions in the event of death 
are simply insurances, and must be paid for like 
any other insurance. The more the system of 
making returns of contributions is extended, the 
more does the character of the institution depart 
from that of a pension fund, and approach that 
of a savings bank." * 

While, however, the technical significance of 
the term pension is thus restricted, it may safely 
be asserted that an employer who inaugurates a 
pension system will be disappointed if it does 
not include some benefits in addition to pensions 
proper. At least the following should be pro- 
vided either in the retirement plan or in some col- 
lateral plan like group insurance. 

1. A retirement benefit in the form of a pen- 
sion or an annuity commencing at superannuation 
and payable in monthly or reasonably frequent in- 
stallments. 

2. A total disability benefit commencing when- 
ever the disability occurs, except as provided for 
under workmen's compensation. 

3. A death benefit, the value possibly increas- 
ing with years of service rendered. 

4. A withdrawal equity in case of separation, 
the value also increasing with years of service. 2 

Barnes J. M'Lauchlan. "The Fundamental Principles of 
Pension Funds": Transactions of the Faculty of Actuaries, 
Vol. IV, No. 41, p. 224. 

2 In the case of a cumulative annuity system, such a with- 
drawal equity, on a deferred basis, is inherent in the plan. 



SCHEME OF BENEFITS 201 

While many other features can be added, such 
a schedule of benefits fairly meets the require- 
ments of a retirement plan. Moreover, there is 
much to be said in favor of limiting benefits to 
such a schedule. 

The Retirement Benefit 

The inclusion of a retirement benefit calls for 
no discussion. This is, of course, the primary 
consideration. The desirability of making this 
payable in monthly or other frequent installments, 
however, may be emphasized. Under some plans 
a worker, on retirement, is permitted to take the 
accumulated value of the benefit in a lump sum. 
While in a few cases this may be advantageous 
to the recipient, as a general rule it is almost cer- 
tain to prove unwise. Workers who thus take a 
lump sum payment will be inclined to risk it in 
investments at an age when they neither are fitted 
nor can afford to take such chances. Moreover, 
they become the marked victims of unscrupulous 
promoters with doubtful schemes to offer or doubt- 
ful securities to sell. Indeed, if one purpose of 
an employer in establishing a pension system is 
to assure workers of a means of support in old 
age, it seems imperative that the payments be 
made in regular installments and not on a lump- 
sum basis. 



202 INDUSTRIAL PENSION SYSTEMS 

It seems exceedingly desirable, moreover, in the 
case of workers who die shortly after going on 
the pension roll, that such a retirement benefit 
be paid to their estates until the accrued value of 
the equity has been exhausted. Under some 
plans, only one monthly payment is made to the 
estates of such annuitants. While such a prac- 
tice can be defended, it is in the nature of a 
tontine arrangement. It is true that a guarantee 
of some stipulated number of payments to the 
estate of a pensioner who thus dies before his 
equity is exhausted will add materially to the cost 
of a plan. Nevertheless, such a guarantee seems 
desirable. Otherwise, a worker who has depended 
on his pension to support his wife or other mem- 
bers of his family in old age may leave them com- 
pletely unprovided for in the event of his death. 
Where a plan is on a contributory basis, it is only 
reasonable that the equity built up by the work- 
er's contribution shall thus be paid out to his es- 
tate in the event of his death. Indeed, as already 
made clear, under a contributory system, the em- 
ployees will almost certainly demand that the 
accrued value of their equity be thus returned. 
As repeatedly pointed out in this report, the 
argument holds with equal force under a non- 
contributory system to the extent that the de- 
ferred-pay theory has been applicable. 



SCHEME OF BENEFITS 203 

The Total Disability Benefit 

The inclusion in the retirement system of a 
total disability benefit is easily justified. The 
moment a worker is totally incapacitated he is 
financially helpless, and provision against this 
contingency as part of a retirement scheme is en- 
tirely logical. Moreover, the increase in cost 
ordinarily is relatively small. To the extent that 
such permanent incapacitation is already pro- 
vided for through Workmen's Compensation Acts, 
duplication of benefits through a retirement plan 
may, of course, be avoided. 

While, however, a total disability benefit is a 
desirable feature of any retirement scheme, in 
the case of a system of paid-up annuities like 
that discussed in Chapter V there are strong ar- 
guments in favor of providing this benefit through 
a separate policy rather than in the annuity 
policy itself. Otherwise (since the annuity poli- 
cies would be retained by the worker in case he 
left the service) an employer might be insuring 
workers against future disabilities which had no 
relation to their service for him. 

The Death Benefit 

Opinions differ as to whether a retirement plan 
should provide a death benefit, but the weight 



204 INDUSTRIAL PENSION SYSTEMS 

of argument is strongly in favor of its inclusion, 
either directly in the plan, or by some collateral 
plan of insurance. It seems reasonably clear that 
a worker with a family of young children will be 
far more disturbed over the possibility of their 
being left helpless when he is, perhaps, their sole 
support, than over his own dependency late in life 
when, perhaps, the same children will be able to 
assist him. In any event, it seems apparent that 
a worker should reasonably expect a death benefit 
equal at least to that which he could secure as a 
withdrawal benefit by a voluntary separation 
from the service. Indeed, a death benefit should 
be much greater than his withdrawal equity, 
where death occurs before the worker has reached 
an advanced age; otherwise it may be too small 
to be of real value. In any case, however, such a 
death benefit will make only temporary, or par- 
tial, provision for dependents, but, again, the 
rest of the burden may fairly be placed upon 
society. 

In general, it seems advisable to cover the death 
hazard by a separate arrangement as, for in- 
stance, group insurance. This is especially true 
in the case of a system of paid-up annuities, for 
the same reasons as just noted in the discussion 
of a disability benefit. Since under an annuity 



SCHEME OF BENEFITS 205 

system the benefits would go to the worker even 
though he became separated from the service, the 
inclusion of these benefits in the policy might 
mean that an employer would be expending funds 
to cover hazards incurred by the worker later, in 
the service of another establishment. It is not 
reasonable to expect an employer to do this. 
Under an annuity system the retirement benefit, 
however, runs pro rata with the service rendered 
for the given establishment. 

While much might be said in favor of a uniform 
death benefit for all workers, on the whole it seems 
reasonable that this benefit should increase mod- 
erately in proportion to the years of service ren- 
dered up to some given limit. 1 

The exclusion of a death benefit from a pen- 
sion plan can be defended, but the arguments in 
favor of its inclusion appear to be convincing. 

One writer has described the objections to state 

1 The scale of death benefits provided by the pension plan of 
one large industrial company is as follows, with a minimum of 
$500 and a maximum of $2,000. 

For 1 year's service, 3 months' full pay. 

For 2 years' service, 5 months' full pay. 

For 3 years' service, 7 months' full pay. 

For 4 years' service, 9 months' full pay. 

For 5 years' service and over, 12 months' full pay. 

Some such schedule of death benefits is not uncommon in 
pension plans. Often, however, the death hazard is covered by 
group insurance. 

In many plans no death benefit is provided. 



206 INDUSTRIAL PENSION SYSTEMS 

pension systems without a death benefit, in a pic- 
turesque manner, as follows: 

"It is obvious that the State gambles with its 
employee for his wage. I will give you a portion 
of your wage as you earn it; the remainder we 
will toss for when I am finished with you. You 
yourself are the coin, with life on one side and 
death on the other. Live you win; die you lose. 
It is merely a case of robbing Peter to pay Paul, 
but Peter suffers none the less. What happens is 
somewhat as follows: Peter dies before he is pen- 
sionable. The total deductions made by the Gov- 
ernment for the marketable value of his labors 
on account of the pension thereupon become lost 
to his dependents who, by reason of the early loss 
of Peter's wage-earning capacity, need it more 
than if he had lived — and go instead to make up 
Paul's pension when he retires, whose dependents, 
by reason of Paul's two hands being still avail- 
able, need it perhaps less than do the defrauded 
relicts of Peter." 1 

The Withdrawal Equity 

The arguments in favor of a withdrawal equity 
have already been discussed in connection with 
the question of deferred pay. Under a contribu- 
tory plan, common justice requires the provision 
for a withdrawal benefit representing at least the 

1 Michael Peters. "The Mischief of Pensions." The Gentle- 
man's Magazine, London, August, 1907, pp. 113-114. 

See also Meriam. "Principles Governing the Retirement of 
Public Employees," p. 234. 



SCHEME OF BENEFITS 207 

net 1 contribution of the worker to the scheme, 
plus interest. 

As already pointed out, to the extent that the 
deferred-pay theory holds, it is difficult to escape 
the conclusion that the worker is entitled to with- 
draw the employer's contribution as well as his 
own, subject to the limitations noted below. 

Moreover, to the extent that the deferred-pay 
principle is operative, a withdrawal equity should 
similarly be recognized under a non-contributory 
system. Such return of employer's contribution is, 
however, extremely rare, even under a contribu- 
tory system. Nevertheless, the argument in favor 
of it is very strong. It may be noted that the sys- 
tem of paid-up annuities clearly accepts this prin- 
ciple, since each annuity, when purchased, at 
once becomes the absolute property of the worker, 
regardless of whatever proportion of the cost may 
have been borne directly by the employer. 

1 A withdrawal benefit, it should be noted, may not neces- 
sarily equal the total contribution of the worker, plus interest, 
since, where death and disability benefits are provided, a 
proper proportion of the worker's contribution may be re- 
garded as a charge for protection against these hazards. Thus, 
one writer says: 

"The amount returned in event of resignation or dismissal 
in a wholly contributory system may with full and complete 
justice to the employee be less than the total amount of con- 
tributions with interest, if any of the benefits are in the nature 
of insurance against risks such as death or disability, against 
which the employee has been protected during his period of 
service and for which protection already received he should 
pay." — Lewis Meriam. "Principles Governing the Retirement 
of Public Employees," p. 231. 



208 INDUSTRIAL PENSION SYSTEMS 

Sickness Benefit Inadvisable 

Some pension systems also provide sickness 
benefits and benefits to widows or dependent chil- 
dren. The weight of argument is, however, against 
this. It is true that sickness is one of the major 
hazards before the industrial worker and, more- 
over, one of the principal causes of dependency. 
It is also true that the possibility of loss of wages 
as a result of sickness or unemployment is re- 
garded by the average worker with far more con- 
cern than the possibility of dependency in old 
age, or the possibility of premature death. Even 
if it be conceded, however, that some cooperative 
scheme for meeting the sickness hazard is desir- 
able, it will ordinarily be found inadvisable to 
include such a provision within a pension plan. 
Where a pension plan is financed wholly or chiefly 
by the employer there is grave danger that the 
inclusion of a sickness benefit will lead to ma- 
lingering, while the possibility of violent increases 
in expenditures because of epidemics or for other 
reason tends to jeopardize the security of the 
pension itself, the protection of which is of prime 
importance. 

Much may be said in favor of sickness benefit 
schemes financed by mutual associations of em- 
ployees themselves, either with or without any 



SCHEME OF BENEFITS 209 

direct assistance from the employer. This matter 
need not be discussed here, further than to sayj 
that it should be treated as a problem separate 
from the problem of pensions. 

Provision for Widows and Children Impracticable 

Specific provision for widows and dependent 
children cannot reasonably be expected of an or- 
dinary pension plan. Industry cannot provide 
against all the hazards of life. Moreover, the 
private employer may with justice take the ground 
that his criterion should be the service rendered 
and not the number of an employee's dependents. 
To the extent that a return of contributions in 
the event of death is provided, some provision; 
though small, is in fact made for dependents: 
It is, as already stated, reasonable to provide 
that a retirement benefit shall continue to go to 
the estate of a pensioner who dies shortly after 
going on the pension roll, until the net value of 
the pension earned or accumulated up to the time 
of his retirement had been paid out. Some such 
provision seems only just; otherwise the plan as- 
sumes a tontine character. While such a provision 
may result in a substantial benefit to dependents, 
it would not be contingent upon the length of 
their lives or upon the length of time during which 
they might need assistance but, instead, would be 



210 INDUSTRIAL PENSION SYSTEMS 

measured by the value of the equity which the 
worker had built up by his service. Beyond this, 
provision for dependents may properly be re- 
garded as the concern of society as a whole, rather 
than that of a private retirement scheme. 

In this connection it may be noted that where 
a plan includes provision for the dependents of a 
worker it usually happens that in time these will 
constitute a larger proportion of the total num- 
ber of pensioners than will the workers them- 
selves. This experience has been common in the 
case of public service pensions of long standing. 

Amount of Benefit 

Having decided upon the character of the bene- 
fits to be included, the next step is to determine 
upon their amount and the method of arranging 
them. 

With respect to the retirement allowance 
proper, the best opinion is in favor of moderate 
benefits. One strong argument in favor of this 
is the practical consideration of cost. A further 
point is that the benefit should not be so large 
as to induce men amply able to work to cease 
productive activity. As pointed out on page 27 
a pension should not be regarded as a means of 
affording men approaching old age an oppor- 
tunity for extended idleness. 



SCHEME OF BENEFITS 



211 



A common practice is to provide pensions of 
anywhere from $18 to $30 a month for workers 
who ordinarily will not go on the pension roll 
until, say, sixty-five years of age. Some years 
ago pensions of $12 a month were not uncommon, 
but there has been a tendency to increase the 
minimum, which ordinarily, where one is named, 
is not less than $20 a month. 

The minimum pension stipulated in several 
plans which contain such a provision is as fol- 
lows: 



American Smelting & Refining Co. $20 per month 

American Sugar Refining Co 20 

Case (J. I.) Threshing Machine Co. 18 

Cleveland Cliffs Iron Co 18 

Colorado Fuel & Iron Co 20 

Crane Co 30 

Crompton & Knowles Loom Works 15 

Deere & Co 18 

Diamond Match Co 25 

International Harvester Co 30 

Pittsburgh Coal Co 20 

Standard Sanitary Mfg. Co 20 

U. S. Steel & Carnegie Pension 

Fund 12 " " 

The pension plans of the above companies are 
of the non-contributory type. The minimum al- 
lowances^ — and maximum figures — for several 
other companies and for some other types of plan' 
will be found in the Appendix. 



212 INDUSTRIAL PENSION SYSTEMS 

In a large number of cases the pension is de- 
pendent upon the final wage, or on the average 
wages for the last five or ten years of service. A 
common practice is to allow one per cent or more 
of such final wage for every year of service. This" 
method, it will be seen, tends to make allowances 
for different lengths of service and also for dif- 
ferences in the wage status of the recipients. 
While both these features may be highly desirable, 
this method of calculation is a very dangerous one, 
and objectionable. The danger is well illustrated 
by the great increase in wages which has taken 
place in recent years as a result of the dis- 
turbances caused by the World War. The use of 
the final wage or average wage for, say, five or 
ten years injects a very serious element of insta- 
bility into the pension plan. It also obviously 
tends to produce inequality as between different 
pensioners. For instance, under such an arrange- 
ment pensioners who have gone on the rolls since 
the war period will draw much heavier benefits 
than was originally contemplated. It is entirely 
safe to predict that this will force a radical re- 
organization of more than one pension plan now 
in operation. 

Instead of basing the pension on the final wage, 
or an average of wages, a much safer method is to 
base the contribution on the wages received dur- 



SCHEME OF BENEFITS 213 

ing the accumulation period, and let the amount 
of such contributions as accumulated under the 
compound interest principle determine the bene- 
fit wiien the pensioner actually enters upon the 
pension roll. An objection to this method is that 
the worker cannot know in advance just what 
his pension will be. But at least he can estimate 
the amount with some degree of accuracy. In 
any event the worker is better off with the cer- 
tainty of a substantial payment than with a pros- 
pect that the plan may be so radically reorganized 
as to practically shut him out of any benefit 
whatever, as has sometimes happened. It may 
be noted that such a scheme of basing contribu- 
tions on the wages received while the fund is 
being built up takes account both of differences in 
wage status and in length of service. 

A system of paid-up annuities such as that out- 
lined in Chapter V has a distinct advantage in 
this respect, since the amount of the annuity 
secured by each year of service is definitely guar- 
anteed by the insurance company underwriting 
the plan. The aggregate amount is, moreover, di- 
rectly proportional to the length of service ren- 
dered. 

Such an annuity system can be made to take 
account of differences in wages by providing, in- 
stead of a uniform yearly annuity for all workers, 

\ 



214 INDUSTRIAL PENSION SYSTEMS 

that the amount shall be whatever a given per- 
centage of the current year's wage will buy. This 
involves a considerable administrative burden, 
however, and insurance companies prefer to write 
their annuities in round amounts. A simple 
method of making an approximate recognition of 
differences in wages would be to classify workers 
into wage groups, with a uniform annuity for 
workers coming within a given group but varying 
as between different groups. 

As a matter of fact, there is considerable to be 
said in favor of disregarding the amount of wages 
earned in fixing annuities and letting these vary- 
only with the length of service rendered. 

Arbitrary Retirement Age Objectionable 

Another common, but objectionable, practice in 
many pension plans is to fix an arbitrary age of 
retirement, either at the option of the worker or 
at the option of the company. A more desirable 
arrangement is to make the retirement age sub- 
ject to the discretion of a pension committee, 
provided there is adequate guarantee that the 
worker's rights will be protected. If a worker is 
fully able to perform his task there is no real 
reason for retiring him simply because he has 
reached, say, age sixty or sixty-five. Ordinarily 
his wages, even at that age, will be considerably 



SCHEME OF BENEFITS 215 

larger than his pension, while, moreover, it is 
desirable, both from his standpoint and from the 
standpoint of society, that he should continue to 
be a producer as long as he is able to do so. In 
this connection it may be noted that most work- 
ers of from sixty to sixty-five years of age prefer 
to continue on the payroll rather than to go on 
the pension roll. Instances are very numerous 
where workers have protested against being 
placed on the pension roll at a stipulated age or 
where, having been placed on the pension roll, 
they have asked for reinstatement on the payroll. 

Where a retirement age is stipulated there is 
much to be said in favor of making it fairly high, 
say, sixty-five years in the case of males, with 
provision for earlier retirement if the worker be- 
comes incapacitated. Aside from the desirability 
of allowing the worker to continue on the payroll 
as long as he is able to perform his work effi- 
ciently, is the important question of cost. 

A good illustration of the increased cost of a 
pension system as a result of lowering the age of 
retirement is afforded by the following table sub- 
mitted to the Executive Committee of the United 
States Civil Service Retirement Association by 
actuaries of the New York Life Insurance Com- 
pany in 1902, the rates being applicable to a given 
pension for the salary group under consideration. 



216 INDUSTRIAL PENSION SYSTEMS 



Average Percentage of Salary Contribution 



Present 
age 


Pension 

age, 70 

Per cerd 


Pension 

age, 60 

Per cent 


Pension 

age, 55 

Per cent 


15 

25 
35 
45 


OS 
1.5 
2.9 
52 


1.6 

2.8 

5.5 

10.8 


2.6 

4.8 

9.8 

21.1 



In the case of a system of paid-up annuities it 
is necessary to have a stated retirement age in 
order to enable the insurance company to make 
its calculations. However, it may easily be pro- 
vided that the worker who reaches the retirement 
age and who is still able to perform his task may 
defer the commencement of the annuity pay- 
ments until he is incapacitated, in which case the 
yearly installments will rise rapidly. 1 On the 

1 Thus the annual payments under one type of annuity 
policy yielding $10 at age 65 increase as follows if not drawn 
upon until a later year: 

Age Males Females 

65 $10.00 $10.00 

66 11.07 10.95 

67 1230 12.03 

68 13.72 1324 

69 15.36 14.63 

70 1726 1622 

On the other hand, such an annuity policy yielding $10 per 
year at age 65, would yield only the following amounts if pay- 
ments were commenced at age 60, 61, 62, 63, or 64, respectively: 

Age Males Females 

60 $4.4S $4.48 

61 524 5.24 

62 6.17 6.17 

63 725 725 

64 8.49 S.49 



SCHEME OF BENEFITS 217 

other hand, it can be provided that, if necessary,- 
the annuity may be payable before the stated age. 
In this case, as already made clear, the install- 
ments of the annuity will be very sharply reduced, 
since the insurance company not only loses the 
interest accumulation, but at the same time must 
figure on a greater expectancy of life. 



CHAPTER X 

SUMMARY AXD CONCLUSIONS 

From the preceding discussion it is apparent 
that the pension problem, even in its narrower 
or immediate aspects, is an exceedingly compli- 
cated one. Whatever system the employer may 
select, he is confronted with perplexing questions 
which cannot safely be disregarded. 

For convenience, some of the major points de- 
veloped in the previous chapters are brought to- 
gether in the summary analysis on pages 220 
to 223. 

Discussions of the pension problem often have 
hinged largely upon the question whether the 
proposed system was of the contributory or non- 
contributory type. While it seems exceedingly 
desirable that the employee shall contribute di- 
rectly to the cost of a pension system, it should 
be repeated that this matter is less vital than the 
question whether the system recognizes definite 
rights on the part of the worker. Where a system 
is operated on a contributory basis, the employer 
practically is compelled to recognize certain 

rights. Otherwise, the worker presumably would 

218 



SUMMARY AND CONCLUSIONS 219 

be unwilling to contribute. However, if the 
principle of deferred pay is accepted — and it is 
difficult to see where, within the limits stated in 
Chapter II, that principle can be denied — the 
worker in reality is contributing to the cost under 
a non-contributory system. The essential ques- 
tion, therefore, is not whether the worker con- 
tributes directly but, rather, whether the pension 
system definitely and adequately safeguards his 
rights under the plan. 

It has been shown that the "discretionary" 1 
type of pension system has been generally con^ 
demned by disinterested critics, not merely be- 
cause of its inadequacy and its liability to abuse, 
but on the more fundamental ground that it does 
not place the worker's status on a definite con- 
tractual basis. It is axiomatic that a pension 
system should carry all reasonable assurance that 
the pensions will be paid. To quote again from 
the Report of the Special Committee of the Mer- 
chants' Association of New York, "A pension 
promise that is not certain involves an uncertain 
morality." 

The issue of deferred pay is vital. To the ex- 
tent that that principle is actually operative, it 
seems clear that a pension system should defi- 
nitely recognize the right of the worker to a return 
of the pay so deferred. In this respect the "dis- 



220 INDUSTRIAL PENSION SYSTEMS 






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SUMMARY AND CONCLUSIONS 221 



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222 INDUSTRIAL PENSION SYSTEMS 



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224 INDUSTRIAL PENSION SYSTEMS 

cretionary" type of pension is seriously inade- 
quate and, indeed, may be grossly inequitable. 
The contributory type of pension system usually 
meets this issue in part. A system of paid-up 
annuities on the lines described in Chapter V 
should meet it squarely, regardless of whether or 
not the worker directly contributes to the cost 
of the plan. 

While, however, the question of direct contri- 
butions is of less importance than the question of 
contractual right, the contributory system is to 
be recommended wherever it is practicable. Not 
only will workers ordinarily take a keener interest 
in the plan, but they can feel that they are largely 
providing for their superannuation through their 
own effort. 

It has been shown that the employer cannot 
reasonably expect a pension system to bring tan- 
gible results in the way of reduced labor turn- 
over, or greater contentment, sufficient to justify 
its administrative burden and cost. An annuity 
system, however, because of its greater certainty 
and more direct appeal, may have an important 
influence on labor turnover. 

It has also been shown that the use of pension 
systems for purposes of disciplinary control is 
likely to prove disappointing while, moreover, 



SUMMARY AND CONCLUSIONS 225 

such use of a pension system is inherently ob- 
jectionable. 

The one controlling incentive to adopt a re- 
tirement system from the employer's standpoint 
is that it may enable him more readily to dismiss 
workers who, because of superannuation or other 
disability, are no longer able to perform their 
tasks and who reduce the efficiency of the force 
as a whole. While other results of a pension sys- 
tem may be important, they ordinarily will be 
incidental to, or at least collateral to, this main 
object. 

The inevitable tendency of expenditures to in- 
crease over a long period of time under a formal 
pension system should be clearly appreciated. An 
employer who decides to inaugurate a pension or 
annuity system should have the cost most care^ 
fully estimated by competent experts, making 
certain that all due attention is given to the 
problem of "accrued liabilities." Practically the 
only safe method of financing a formal pension 
system is on the reserve basis, after detailed actu- 
arial calculations. Even then, frequent revalua- 
tions of the plan will be necessary to safeguard 
its solvency. In general, the only safe policy is 
to determine the benefits on an actuarial basis, 
by the amount which the contributions will jus- 



226 INDUSTRIAL PENSION SYSTEMS 

tify, and not to make them directly contingent 
upon the salary or wages of the employee. 

The too common practice of following the pro- 
visions of some plan that seems attractive is an 
exceedingly dangerous one. While the type of 
plan should be determined on broad grounds of 
equity and economic soundness, the details should 
be worked out with special reference to the needs 
of, and the conditions prevailing in, the individ- 
ual establishment, particularly in respect to age 
and sex distribution and labor turnover. Any at- 
tempt to apply a general formula is practically 
certain to lead to disaster in a large majority of 
cases. Unless an employer is ready to assume 
the burden and expense of thus preparing a sys- 
tem adapted to his individual needs, he should 
avoid committing himself to the adoption of 
any formal system. 

Broader Aspects of the Pension Problem 

From the standpoint of the individual em- 
ployer the pension problem may seem to be 
chiefly one of costs and tangible results. In 
reality, these considerations are far less impor- 
tant than the fundamental issues of social and 
economic policy involved. The pension issue is, 
indeed, one of the broadest and most far-reaching 



SUMMARY AND CONCLUSIONS 227 

of the many perplexing problems arising out of 
the industrial relationship. 

Final judgment on the broad question as to 
whether any system of pensions is desirable in 
private industry will depend very largely upon 
the attitude of the critic towards the labor rela- 
tionship from a social standpoint. Those who 
feel that it is desirable that wage earners shall be 
responsible for their own destinies, and who wish 
to reduce the element of paternalism on the part 
of the employer to a minimum, will, in general, 
be opposed to private industrial pension systems, 
at least unless these are of a contractual char- 
acter. They will be receptive to the argument 
that most pension systems keep down immediate 
or money wages and tend at the same time to 
accentuate class distinctions between employers 
and employees. Such critics, if consistent, will 
take the position that even though the task of 
raising the real wage status of workers as a whole 
may be slow, in the long run Labor will be bene- 
fited by meeting the situation squarely rather 
than by accepting such temporary relief as may 
be afforded through pension systems, at least 
where these take the form of a gratuity. Others, 
who have no prejudice against pension systems 
per se, often may be inclined to oppose the ex- 



228 INDUSTRIAL PENSION SYSTEMS 

tension of such systems in private industry until 
the various complexities of the problem have 
been more carefully analyzed. Experience thus 
far has been too brief and too limited to warrant 
final conclusions on many points. As the Ap- 
pendix accompanying this volume shows, most 
private industrial pension systems are of com- 
paratively recent origin. Thus, of ninety- three 
pension plans there listed, only ten were in- 
augurated prior to 1910. This limited experience 
would, in any event, necessitate conservatism in 
passing judgment. The ultimate results of such 
systems can be determined only after very ex- 
tended operation. A further consideration in this 
connection is that many students of the pension 
problem feel that it is not one to be undertaken 
by employers alone, but jointly by employers, 
employees, and the general public. It will be 
remembered that several of the authorities cited 
in Chapter I took such a position. 

The individual employer, faced with the neces- 
sity of retiring aged or disabled workers who 
are reducing the efficiency of his force, can hardly 
be blamed for not waiting until the problem is 
worked out on these broad lines, or for adopting 
any system which seems to promise an improve- 
ment over a continuation of existing conditions in 
his establishment. But it should be recognized 



SUMMARY AND CONCLUSIONS 229 

that such efforts, however well meant, may prove 
unsatisfactory. 

It may fairly be said that most pension systems 
now in operation do not make a substantial ap- 
proach toward solving the problem of old age 
dependency among industrial workers. From the 
evidence presented in preceding chapters, it is 
obvious that only a trifling proportion of wage- 
earners ever go on the pension roll. A much 
larger number, although spending the greater 
part of their lives in industry, become separated 
from the service without any retirement benefit. 
If Industry is to undertake to deal with the super- 
annuation problem at all, it may fairly be re- 
quired to devise some more equitable and more 
effective method than that reflected in existing 
private pension practice. 

In this respect the annuity system, discussed in 
Chapter V, has a particular appeal, and especially, 
if its introduction could be made general among 
industrial establishments. With such a system in 
practically universal operation, the great body of 
wage-earners would be making some provision 
for support in old age and (except for the 
"trial service" period) pro rata with every year of 
service rendered. Because of this fact the annuity 
system seems entitled to most serious considera- 
tion, not only by industrial executives, but by the 



230 INDUSTRIAL PENSION SYSTEMS 

public at large. If, instead of pensioning off a 
mere handful of superannuated workers, a system 
can be devised by which the great majority of 
these workers will have acquired a substantial pro- 
vision against old age by the time they become 
superannuated, then society as a whole, as well 
as these individuals, should reap a substantial 
benefit, while the burden would be distributed in- 
stead of falling on the last employer. 

Under such a condition it should be possible to 
effect a material reduction in the cost of poor 
relief, which is a very important factor in the 
tax bill of every community. More important 
than this possible reduction in taxes, however, is 
the fact that the great body of wage-earners could 
feel that their income in old age had been fairly 
earned by their service during their productive 
years. The difference in the effect upon national 
character of having these workers thus virtually 
self-supporting in their old age. instead of objects 
of charity, or recipients of gratuities, can hardly 
be over-estimated. 



APPENDIX I 

ANALYSIS OF PENSION PLANS IN INDUSTRIAL 
ESTABLISHMENTS 

Note 

The following tables give a brief analysis of im- 
portant features of those pension plans of industrial 
establishments assembled in the course of this study. 

Because of the numerous details in any given pen- 
sion plan and the great variation in provisions as 
between different plans, it is impracticable to present 
all the facts in such a condensed comparative analy- 
sis. For example, the age and service requirements 
contained in the plan of one large company are as 
follows: 

(a) "Any male employee when he shall have 
reached the age of seventy years, and any female 
employee when she shall have reached the age of 
sixty-five years, shall be required to retire, irrespec- 
tive of length of service. 

(b) "Any male employee when he shall have 
reached the age of sixty-five years, and any female 
employee when she shall have reached the age of 
sixty years, who in either case shall have been in the 
continuous service of the Company twenty years or 
more, may, at the request of the employee, subject 
to the approval of the Executive Committee, be re- 
tired from active service. 

231 



232 INDUSTRIAL PENSION SYSTEMS 

(c) "Any male employee when he shall have 
reached the age of sixty years, and any female em- 
ployee when she shall have reached the age of fifty- 
five years, who in either case shall have been in the 
continuous service of the Company for twenty-five 
years or more, may, at the request of the employee, 
subject to the approval of the Executive Committee, 
be retired from active service. 

(d) "Any male or female employee who shall have 
been thirty years or more in the continuous service 
of the Company, may, at the request of the employee, 
subject to the approval of the Executive Committee, 
be retired from active service. 

(e) "Any employee who shall have been fifteen 
years or more in the service of the Company, and who 
shall have become permanently totally incapacitated 
through no fault of his or her own, as the result of 
sickness or injury (compensation for which has not 
otherwise been provided), may, at the request of the 
employee, subject to the approval of the Executive 
Committee, be retired from active service." 

To give all the information with respect to age and 
service requirements for a large number of companies 
would have made the tabulation so unwieldy as to be 
almost unreadable. Instead, effort has been made 
to give the age and service requirements that would, 
as a matter of practical experience, be most generally 
applicable. Thus, in the case of the plan above 
quoted, the age and service requirements are given 
in the table as sixty-five and twenty, respectively, 
for males, and sixty and twenty, respectively, for 
females, as it seems reasonably certain that more 
workers would be retired under these provisions than 
under provision (a), which requires an age of seventy 



APPENDIX I 233 

for males and an age of sixty-five for females, or 
under provision (c), which reduces the age limit, but 
increases the required service period to twenty-five 
years. 

It should be understood, therefore, that in most 
cases the plans contain other provisions than those 
listed in the table. Most plans, moreover, contain 
exceptions, or special provisions. In order to get 
complete information in any specific case it is neces- 
sary to refer to a copy of the plan itself. 

It will be noted in the first column under the head- 
ing "Amount of Pension" there is given a percentage 
of the average salary for the final ten years which 
is to be multiplied by the number of years of service. 
Thus if the average annual wage for such a ten-year 
period were $1,000 and the pension one per cent of 
this for every year of service, the total pension in the 
case of a worker with, say, thirty years of service, 
would be $300, as follows: 

Average wage for final ten years $1,000 

One per cent of this 10 

For thirty years of service the total pension 

would be 300 

The use of the final wage for ten years of service is 
so common that this has been taken as a standard. 
In many cases, however, the average wage for the 
final five years, or the final three years, of service 
(or some other period) is used as a basis. Such cases 
have been indicated by inserting in parentheses the 
number of years actually taken as a basis. 

With respect to maximum and minimum amounts 
of a pension, it should be noted that sometimes this 



234 INDUSTRIAL PENSION SYSTEMS 

is a given percentage of such average wage for the 
final ten years (or other period), and that sometimes 
this is limited by a fixed maximum. Thus, in the 
case of the American Brass Company the maximum 
is sixty per cent of the average salary for the final 
three years of service, provided this amount does 
not exceed $5,000. 

Where it was known that the company had a group 
insurance plan in force, this fact has been indicated 
under the column headed "Death Benefit Provision," 
but since the number of companies adopting such 
plans is constantly increasing, the information on this 
point may not be complete. 

An examination of this appendix table shows that 
a service requirement of twenty years is very com- 
mon, and that a shorter period is infrequent. Service 
requirements of twenty-five years are fairly frequent, 
and are found in connection with an age limit of 
sixty-five years, as well as of sixty years. In many 
cases, as already indicated, the same plan provides 
both for an age requirement of sixty-five years with 
twenty years of service, and for an age requirement 
of sixty years with twenty-five years of service, or 
some other arrangement. 

The age requirement for women frequently is five 
or ten years less than that for men, or, in other words, 
frequently is fifty-five, or even fifty years. 

A considerable number of plans provide for com- 
pulsory retirement; in a majority of such cases this 
is fixed at seventy years. 

In many plans provision is made for retirement at 
the request of the employee when he has fulfilled 



APPENDIX I 235 

the terms of the plan. In such cases the pensionable 
age is either sixty years or sixty-five years. In gen- 
eral, the plan reserves the right to the employer to 
retire a worker at the discretion of the Pension Board 
or Committee; in some cases, however, it is provided 
that the worker shall not be arbitrarily retired against 
his own wishes. 

In general, where a minimum allowance is stipu- 
lated, this is $18 or $20 per month; a minimum of 
$300 per year is provided in a number of cases. 
Maximum provisions vary widely. One plan, that 
of the Midvale Steel & Ordnance Company, provides 
for a flat pension of $30 per month in all cases. 



236 INDUSTRIAL PENSION SYSTEMS 





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238 INDUSTRIAL PENSION SYSTEMS 





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240 INDUSTRIAL PENSION SYSTEMS 



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APPENDIX I 



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242 INDUSTRIAL PENSION SYSTEMS 



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APPENDIX II 

SELECTED BIBLIOGRAPHY 

No attempt has been made, in preparing this bibli- 
ography, to compile an extended list of works on 
the subject of pensions, but, instead, merely to 
include a selected number of books and articles which 
seem of particular value to the employer who may 
be considering the adoption of a pension plan, or to 
the general student of the subject. 

General 

Industrial Pensions. Merchants' Association of New 
York, 1920. Report of Special Committee on 
Industrial Pensions and Report of a Survey of 
Industrial Pension Systems by the Industrial 
Bureau of the Association. 
A brief, but valuable, discussion. 

Old Age Dependency in the United States. Lee Well- 
ing Squier. 1912. A general survey of the pen- 
sion movement up to that time. 

Principles Governing the Retirement of Public Em- 
ployees. Lewis Meriam. 1918. 

While dealing with pensions in the public serv- 
ice, this work is of great value to the student of 
private pension systems. A special feature is the 
frequent reference to other literature on the pen- 
sion problem. 

251 



252 INDUSTRIAL PENSION SYSTEMS 

Pensions for Hospital Officers and Staffs. Sub-Com- 
mittee of the Executive Committee of King 
Edward's Hospital Fund for London. 1919. 

An elaborate work containing a large amount 
of material on the operation of various British 
pension funds, as well as a discussion of the 
broader phases of the problem. 

Reports of the Carnegie Foundation for the Advance- 
ment of Teaching. Nearly all the annual reports 
of the Foundation contain references to the pen- 
sion problem. Special mention may be made of 
Bulletin No. Nine (1916), "A Comprehensive 
Plan of Insurance and Annuities for College 
Teachers," by Henry S. Pritchett, President of 
the Foundation, and Bulletin No. Eleven, "Pen- 
sions for Public School Teachers," by Clyde Furst 
and I, L. Kandel. 

Teachers' Retirement Systems in the United States. 
Paul Studensky. 1920. 

Official Reports 

U. S. Government. Retirement of Employees in the 
Classified Civil Service. Various Hearings before 
the Senate Committee on Civil Service and Re- 
trenchment and the House Committee on Reform 
in the Civil Service. 

Retirement from the Classified Civil Service of Super- 
annuated Employees. 

Message from the President of the United 
States transmitting Report of the Commission on 
Economy and Efficiency on this subject. House 
Document No. 732, 62nd Congress, 2nd Session. 

Illinois: Report of Illinois Pension Laws Commission, 
1916; Report of Illinois Pension Laws Commis- 
sion, 1918-1919. 



APPENDIX II 253 

Massachusetts: Report of Commission on Old Age 
Pensions, Annuities, and Insurance. 1910. House 
Document No. 1400. 

Report of Commission on Pensions. 1914. 
House Document 2450. 

Pennsylvania: Report of Pennsylvania Commission 
on Old Age Pensions. 1919. 

Wisconsin: Report of Wisconsin Pension Laws Com- 
mission. 

New York City: Report of Commission on Pensions: 
The Pension Funds of the City of New York. 



Magazine Articles and Pamphlets 

Broadening the Scope of Pensions in Private Indus- 
try: Paul Studensky. u New Jersey.^ Vol. VI, 
No. 8. New Jersey Bureau of State Research. 

Industrial Pensions: Russell Sage Foundation, De- 
cember, 1919. A brief bibliography. 

Industrial Retirement Systems Based on the Money 
Purchase Principle. J. H. Woodward. In Eco- 
nomic World, December 3 and December 10, 1921. 

Our New Peonage: Discretionary Pensions. L. D. 
Brandeis in his "Business a Profession," 1914. 

Problem of Pensions: National Civic Federation, 
1916. Contains a tabulated analysis of various 
plans. 

Pensions as Wages: Albert de Roode. American 
Economic Review, March, 1913. An exception- 
ally concise discussion of the subject. 



254 INDUSTRIAL PENSION SYSTEMS 

The Fundamental Principles of Pension Funds: 
James J. M'Lauchlan. Transactions of the 
Faculty of Actuaries (London), 1909, Volume IV, 
Part VIII, No. 41. 

The Pension Problem and the Philosophy of Contri- 
butions: Paul Studensky. 1917. Bureau of 
Municipal Research, New York City. 



INDEX 



Accrued liabilities: cost of meeting, 172-175; definition, 
172; methods of meeting under annuity system, 192- 
197; under pension systems, 173-174; relation to de- 
ferred-pay issue, 176; to payroll, 174, 175, 194 

Actuarial problems: difficulties of, 144-145; frequent 
revisions of estimates necessary, 145, 181; need of 
expert assistance, 180; Merchants' Association of New- 
York, report cited, 180; simplified under an annuity 
system, 184-185; uncertainties of, 181-184 

Advantages and disadvantages of various types of pension 
systems compared, 220-223 

Age of retirement: (see Ketirement Age) 

American Sugar Kefining Company: pension disburse- 
ments of, 163 

Annuity system: (see Cumulative Annuity System) 

Baltimore & Ohio Railroad Co: pension disbursements 

of, 161 
Benefits under retirement systems: amount of in typical 

plans, 211; influence of retirement age on, 216, 217; 

death benefit, 48, 204, 205; retirement benefit, 201, 202; 

sickness benefit inadvisable, 208, 209; total disability 

benefit, 203; widows' and children's benefits inadvisable, 

209, 210; withdrawal equities, 206-208 
Brandeis, Louis D : quoted, 44, 45, 63 
British Civil Service plan: deferred-pay principle 

endorsed, 60 
British Board of Trade Committee on Superannuation 

Funds: testimony before, 59 
British Royal Commission on Superannuation and Civil 

Service : testimony before, 59 

Cammack, E. E : quoted, 175 
Carver, T. N : quoted, 13 

255 



256 INDEX 

Carnegie Foundation for the Advancement of Teaching: 
reorganization of pension plan, 2; reports quoted, 52, 

93, 101, 106, 161, 172 
Children's benefits: (see Benefits) 
Commons, John R : quoted, 8 

Contractual rights: importance of, 48, 93, 112, 218; 
involve provision for withdrawal equities, 91, 206; lack 
of, under some systems. 47, 50, 67, 73, SI 

Contributions, employers': incidence of, 63; (see also 
Deferred-Pay Principle) 

Contributions, return of: (see Withdrawal Equities) 

Contributory pension systems: advantages of, 94; atti- 
tude of pension authorities, 94; attitude of various 
Commissions toward, 104; benefits usually included 
under, 93; conclusions summarized, 107, 109; contribu- 
tory feature not the vital issue, 149, 218; deferred-pay 
issue under, 97; defined, 48, 93; demand for joint 
management likely; 106; disadvantages of, 105; effect 
on thrift, 101; employees'' contributions essentially 
savings, 9S; employers' contributions seldom returnable, 
100; industrial goodwill promoted by, 99; Meriam, 
Lewis, quoted, 100; M'Lauchlan, James A., quoted, 100; 
Pritchett, H. S., quoted, 94; progress of, 102. 
seldom used in industrial establishments, 49; Squier, 
Lee Welling, quoted, 95; Studensky, Paul, quoted, 

94, 95 

Contributory principle: applicable to annuity system, 
116 ; not vital factor in costs, 149, 218 

Costs of retirement systems : (see also Accrued 
Liabilities) 

Cost of cumulative annuity system: accrued liabilities 
under, 192-197; changes in cost gradual, 1SS, 190; close 
estimates practicable, 190 ; cost of flat-rate and single- 
premium systems contrasted, 191, 192; effect of labor 
turnover on, 1S6; illustrative computation of, 1S9; 
methods of reducing, 195 

Cost of informal pension policy: 138, 177-179 

Cost of pension systems: actuarial analysis essential, 145; 
advantages of reserve method, 14S; contributory fea- 
ture not controlling factor, 149; cost of death and 
withdrawal benefits, 149-154; cost of meeting accrued 
liabilities, 172-175; difficulty of determining, 144; ex- 
perience of American Sugar Refining Co., 163-164; of 



INDEX 257 

Baltimore & Ohio E. E. Co., 158-163; of Otis Elevator 
Co., 164-165; of U. S. Steel Corporation, 165-170; 
frequent "revaluations" necessary, 148, 155; long con- 
tinued increase in, 156; methods of meeting, 146, 147; 
relation of contributory feature, 149; relation of cost 
to payroll, 150-152 
Courtney Commission of Great Britain: quoted, 69; 

testimony before, 58 
Cumulative annuity system: accrued liabilities under, 
192, 197; arguments against, analyzed, 118; arguments 
in favor of, 113-116; benefits under, 111; contractual 
basis essential, 112; contrasted with pension systems, 
112; contributory principle applicable, 116; cost of 
(see Cost of Eetirement Systems), 192-195; cost of 
annuity policies for males, 120; costs governed by 
service, 125; deferred pay issue under, 116; disadvan- 
tages of, 118, 122, 126 ; effect of labor turnover on, 186 ; 
effect on morale of worker, 114, 196; effect on thrift, 
116; general features, 111; methods of reducing em- 
ployees' contribution, 124; modification easy to make, 
117; payments not a gratuity, 112; possible effect on 
national character, 230 ; on taxation, 230 ; primary object 
of, 112, 113 ; withdrawal equities under, 119, 200 

Death benefit: (see Benefits) 

Deferred-pay principle: application of under informal 
policy, 133; arguments against, 61; conclusions as to 
effect on wages, 67; conclusions as to scope, 64-66; 
contention that it is conditional, 68; de Eoode, Albert, 
quoted, 57; general discussion of, 53-86; Hadley, A. T., 
quoted, 63; Illinois Pension Laws Commission, quoted, 
54; Lecky, W. E. H., quoted, 56; Limitations of, 65; 
Massachusetts Commission on Pensions, quoted, 55; 
Meriam, Lewis, quoted, 55; met by cumulative annuity 
system, 116; Mowatt, Sir Francis, quoted, 58; not 
applicable to accrued liabilities, 176; Pennsylvania 
Commission on Old Age Pensions, quoted, 55 ; Pritchett, 
Henry S., quoted, 56; relation of amount of pension to, 
66 ; Special Committee of Executive Committee of King 
Edward's Hospital Fund for London, quoted, 57 ; 
United States Commission on Economy and Efficiency, 
quoted, 55; vital importance of, 219 

deEoode, Albert : quoted, 57, 68, 70 



258 INDEX 

Devine, Edwin T: quoted, 14 

Disability benefits: (see Benefits) 

Discipline: not sought under an annuity system, 113; 
pensions as a means of securing, 41-45; Vanderlip, 
Frank A., quoted, 42 

Discretionary pension systems: abuses of, 25, 26, 82, 85; 
abuses sometimes avoided, 84; advantages of, 82; con- 
ditional character of, 50, 80; criticism of, by L. D. 
Brandeis, 44; by Merchants' Association of New York, 
81, 82; general discussion of, 50-86; right to abandon 
plan essential, 81; summarization of, 79, 80; typical 
clauses in, 51 

Drage, Geoffrey: quoted, 1 

Efficiency : a chief object of pensions systems, 28, 29, 33, 
34, 225; effect of annuity system on, 114; effect of 
pension systems on, 33-36; Mass. Pension Commissions 
quoted, 33, 34; Merchants' Association of New York 
quoted, 36; various opinions in re, 35 

Employers' contribution : relation to withdrawal equities, 
89, 207 

Earnam, Henry W: quoted, 13 
Fetter, Frank A : quoted, 9 
Fitch, John A : quoted, 16, 62 

Giddings, Franklin H : quoted, 9 

Gompers, Samuel: quoted, 22, 40, 41 

Goodwill, industrial: promoted by contributory pension 

systems, 99 
Government employees : attitude toward pension systems, 

21 
Gratuities: not a feature of annuity system, 119, 128; 

pensions often regarded as, 50, 52 

Hadley, A. T : quoted, 12, 63 

Illinois Pension Laws Commission: quoted, 54, 103 
Industry : responsibility of, under pension systems, 9, 11, 

210, 229 
Informal pension policy: (see also Pension Systems), 
138; advantages claimed for, 133; cost of, 138; cost of, 
illustrative example, 178 ; deferred-pay issue under, 133 ; 
disadvantages urged against, 134; may not be adaptable 
to a large establishment, 143; may facilitate hiring of 



INDEX 259 

older workers, 136; Merchants' Association of New 
York quoted, 139-140; not adapted to government ser- 
vice, 137; not the equivalent of a formal system, 143 
Insurance companies: utilized under annuity system, 
112, 115, 185 

King, George: quoted, 3, 182 

Labor: attitude of toward pension systems, 18-23, 129; 
Gompers, Samuel, quoted, 22, 40 

Labor turnover: Brandeis, Louis D., quoted, 44; effect 
of annuity system on, 114, 196 ; effect of pension systems 
on, 37-41 ; effect of withdrawal equities on, 90 ; Gompers, 
Samuel, quoted, 40; Merchants' Association of New 
York, quoted, 39; opinions of employers, 38; Squier, 
Lee Welling, quoted, 44 

Lathrop, Miss Julia C : quoted, 15 

Lecky, W. E. H: quoted, 16, 56, 76 

Leiserson, William M : quoted, 9 

"Limited-Contractual" pension systems: advantages and 
disadvantages summarized, 91-92; contractual feature 
often limited, 89; definition of, 47, 48, 87; employers' 
latitude under, 87; not in common use, 89; typical 
clauses in, 88 

Massachusetts Commission on Old Age Pensions, Annui- 
ties and Insurance: quoted, 30, 33-34, 75, 103 

Massachusetts Commission on Pensions: quoted, 34, 
55, 73 

Merchants' Association of New York: report quoted, 35, 
36, 39, 81, 82, 139-140, 172, 180, 219 

M'Lauchlan, James A: quoted, 100, 200 

Meriam, Lewis : quoted, 18, 27, 30, 55, 72, 100, 207 

Mobility of Labor: (see Labor Turnover) 

Model pension fund: recommended by James A. 
M'Lauchlan, 100 

Mowatt, Sir Francis : quoted, 58 

National Civic Federation: quoted, 104 

New Jersey Bureau of State Besearch : quoted, 74, 95, 96 

Non-contributory "discretionary" pension system: (see 

Discretionary Pension Systems) 
Non-contributory "limited-contractual" pension systems: 

(see "Limited-Contractual" Pension Systems) 



260 INDEX 

Non-contributory pensions: contention that these are 
mere gratuities, 50 

Objects of pension systems: (see Pension Systems, pur- 
poses of) 
Otis Elevator Co: pension disbursements of, 165 

Payroll: relation of contributions to, 150-153 

Pennsylvania Commission on Old Age Pensions : quoted, 
55, 103 

Pensions : amount of important, 66 (see also Benefits) ; 
irrevocable nature of, 1; not intended to promote 
idleness, 27; pensions vs. pension systems, 52 (see also 
Deferred-Pay Principle) ; social aspects of, 2, 227-230 ; 
uncertain definitions of, 3 

Pension systems : abuses of, 72, 82, 85 ; actuarial analysis 
essential, 145, 180; advantages and disadvantages of 
various types summarized, 220-223; advantages of 
reserve method, 148; arbitrary changes in, 84, 85; 
benefits to be included, 200; broader aspects of, 226; 
comparison with annuity system, 112, 184, 197, 220- 
230; contributory feature not controlling factor, 149, 
224, cost of (see Cost of Pension Systems) ; cost of 
death and withdrawal benefits, 149-154; cost of meeting 
accrued liabilities, 172-175; effect on strikes, 41-43; on 
labor turnover, 37-41; experience of American Sugar 
Kefining Co., 163-164; of Baltimore & Ohio R. R. Co., 
158-163; of Otis Elevator Co., 164-165; of U. S. Steel 
Corporation, 165-170; frequent unsoundness of, 1; in- 
adequacy of, 171, 229; inequities under, 25, 229; public 
vs. private, 3, 31-32; purposes of, 4, 45; relation of cost 
to payroll, 150-152 ; types of, defined, 47-48 

Peters, Michael: quoted, 206 

Pritchett, H. S : quoted, 56, 94 

Purposes of pension systems: (see Pension Systems) 

Retirement age : arbitrary age objectionable, 214 ; attitude 
of employees toward, 215; often a source of inequity, 
84; relation to benefits under an annuity system, 213; 
relation to cost of pensions, 216 

Retirement systems: (see Pension Systems, Cumulative 
Annuity System, Informal Pension Policy) 

Return of contributions: (see Withdrawal Equities) 



INDEX 261 

Keward-of-service theory: one purpose of pension sys- 
tems, 24; inadequately met by many systems, 25; vital 
feature of annuity system, 113 

Eights of workers under pension systems: (see De- 
ferred-Pay Principle) 

Eipley, W. Z : quoted, 15 

Kan, Eev. John A : quoted, 10 

Seager, Henry E : quoted, 77 
Sickness benefits: (see Benefits) 
Social aspects of pension systems : 2, 3, 227-230 
Social insurance: 13 

Special Committee of Executive Committee of King 
Edward's Hospital Fund for London; quoted, 58, 70, 
174 
Squier, Lee Welling : quoted, % 44, 86, 95 
Strikes : use of pension systems to discourage, 42-45 
Studensky, Paul: quoted, 95, 98, 99, 104, 174 
Superannuation: moral obligation of employer in re, 9; 
not adequately provided for by ordinary pension sys- 
tems, 171, 230; not chief concern of annuity system, 
113; obligation of public, 9; of industry, 9; of govern- 
ment, 17; various opinions cited, 9-16 

Thrift : attitude of Labor toward, 12 ; Carnegie Founda- 
tion quoted, 101; effect of annuity system on, 116; of 
contributory systems on, 101; of non-contributory sys- 
tems on, 75-77 

Tolsted, Elmer B: quoted, 1, 153 

Tontine features of non-contributory pension systems: 
72-74 

Turnover: (see Labor Turnover) 

United States Commission on Economy and Efficiency: 

quoted, 31, 32, 55 
U. S. Government pension systems : cited, 103 
United States Steel Corporation pension plan: descrip- 
tion of, 166; effect of changes in, 167, 168; inadequacy 
of, 170; number of workers pensioned under, 166; 
pension disbursements under, 166 

Vanderlip, Frank A: quoted, 42 

Wages: effect of pension systems on, 63, 67, 79, 96, 97; 
Hadley, A. T., quoted, 63 



262 INDEX 

Widows' benefits: (see Benefits) 
Willcox, William E : quoted, 104 
Wisconsin Pension Commission : cited, 55, 103 
Withdrawal equity : absence of results in tontine feature, 
72-74, 91; attitude of pension authorities toward, 91, 
100 ; effect of annuity system on, 116 ; effect of contribu- 
tory system on, 100; effect on labor turnover, 90; justi- 
fication of, 91; seldom found in non-contributory sys- 
tems, 89, 91 
Woodward, J. H: quoted, 196 



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